Deflation ‘on cards’ as UK inflation hits zero

Inflation in the UK fell to zero last month setting the country on course for a period of falling prices for the first time in half a century.

The Consumer Price Index (CPI) measure of inflation dropped after recording 0.3% in January, according to the Office for National Statistics.

It was a sharper than expected fall and sets a new record low for CPI since comparable records began in 1989.

Inflation is expected to dip further in coming months. The ONS suggests the last time it was negative was in March 1960, at minus 0.6%

The surprise scale of February’s fall is likely to push back the expected timing of an interest rates hike, currently pencilled in for 2016, putting downward pressure on the pound.

Rates have been held at 0.5% for six years but Bank of England chief economist Andy Haldane has said that in the light of low inflation the next move was as likely to be a cut as a hike.

Low inflation benefits consumers because it means their wages go further, but policy makers fear a prolonged period of negative CPI could have damaging effects. That is because it is feared that deflation would cause consumers to delay spending and firms to put back investment.

At the same time, debt repayments such as mortgages would become more expensive in real terms.

This would threaten what Bank of England governor Mark Carney has described as a “clear and present danger” for the UK’s indebted households and businesses.

The bank must to try to return CPI towards 2% and Mr Carney was obliged to write a letter of explanation to chancellor of the exchequer George Osborne earlier this year when it fell more than 1% off this target.

The latest fall came as food and non-alcoholic beverage prices saw a record year-on-year drop of 3.3%.

Vicky Redwood, chief UK economist at Capital Economics, said: “The UK is now within a whisker of deflation.

“But we doubt that this will turn into more serious and engrained deflation, given that inflation expectations seem well-anchored.

“We still think that deflation in the UK will be a ‘good’ development, giving households’ incomes a welcome boost and supporting the economic recovery this year.”

Chris Williamson, chief economist at Markit, said: “Rather than being a concern, the drop in inflation is a boon to the economy, providing households with greater spending power at a time when pay growth remains frustratingly weak.”

British prime minister David Cameron said: “It is good news that inflation is 0% today… the Bank of England are not saying we face the dangerous deflation that some other parts of Europe may potentially have a problem with. This is because the costs are low, the economy is working well, and we must continue to work through our long-term economic plan.”