Wednesday 7 December 2016

UK enters deflation for first time in more than half a century

Published 20/05/2015 | 02:30

Little movement on prices in the UK – but the phase won’t last, analysts believeHOW
Little movement on prices in the UK – but the phase won’t last, analysts believeHOW

The UK has slipped into deflation for the first time in more than half a century fuelled by air and ferry fares.

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It is the first time that inflation has slipped into negative territory in Britain since March 1960, the UK's Office for National Statistics (ONS)said yesterday.

The ONS said prices fell 0.1pc in the year to April, with the main downward push coming from airfares and sea fares.

Prices for both airfares and ferries rose on the month, but by far less than a year ago, with the timing of Easter a likely factor.

The ONS said Easter fell in the middle of April last year, coinciding with the timing of most air and sea journeys.

"This year, the early Easter meant that the timing didn't coincide, and the price increases in air fares and sea fares that usually take place over the Easter period weren't captured in the inflation rate," the ONS said.

Britain's Chancellor, George Osborne, said the drop did not amount to "damaging deflation", suggesting it would be a temporary blip.

It was a view shared by Bank of England governor Mark Carney, who predicted that while inflation will remain at very low levels over the coming months, it will pick up toward the end of the year.

"We expect inflation to be very low over the next few months. But over the course of the year, as we get towards the end, inflation should start to pick up towards our 2pc target," Mr Carney said.

The falling rate of UK inflation in recent months is due in large part to falling prices for food and petrol. Those prices, however, are now on the rise, but they are still lower than they were a year ago, thereby dragging inflation down.

"Historically, these prices have been responsible for a large proportion of the rate of inflation. Over the last year falling prices for these goods have changed this picture, with food and motor fuel prices reducing the rate," the ONS said.

"Decreases in the price of oil, lower commodity prices and increased competition among the supermarkets are all possible contributing factors."

Although the ONS said the UK had entered deflation, the term deflation is used to describe a sustained period of falling prices, whereas a temporary blip, or an initial drop in prices, is usually regarded as a period of negative inflation.

Analysts believe that it was indeed a temporary blip.

"For now, it represents an obstruction to a Bank of England rate hike," said Alan Clarke, an economist at Scotiabank in London.

"Enjoy it while it lasts because there is a good chance that inflation will be back in positive territory next month," Mr Clarke added..

Philip Shaw, economist with specialist bank Investec, said he didn't expect much change to the policy debate around interest rates in Britain, "with the position remaining that the next move in UK interest rates is most likely to be up".

Irish Independent

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