Britain falls into deflation for first time in 55 years

Deflation has officially struck the UK for the first time in 55 years due to tumbling food and energy prices.

The consumer prices index of inflation finally fell to -0.1 per cent in April, after threatening to turn negative for months, figures from the Office for National Statistics (ONS) showed.

It was the first bout of deflation since official records began in 1996 and the first time “since 1960 based on comparable historic estimates”, the ONS said.

Collapsing food and fuel prices knocked about 0.7 percentage points off the annual rate. A drop in air and sea fares also pressed down on prices, largely due to the early Easter this year. “The Easter funny did its thing and dragged air-fare inflation lower. This will likely reverse next month,” Alan Clarke, UK and eurozone economist at Scotiabank, said.

Economists and officials were quick to dismiss talk of damaging deflation, where falling prices become ingrained and threaten stagnation. This time, deflation should prove temporary, giving household budgets a lift as falling prices compared with wages rising at an average of 1.9 per cent.

The decline meant a basket of goods and services that cost £100 in April 2014 would have cost £99.90 in April 2015.

James Sproule, chief economist at the Institute of Directors, said: “The slip into deflation should not worry us, as it is primarily caused by a drop in the cost of energy, which is good news for households and businesses. Falling prices in necessities, such as food and transport, along with a period of sustained job creation and wage growth mean demand and consumption will remain buoyant.”

Samuel Tombs, UK economist at Capital Economics, claimed the dip “will be short lived … likely to last for one month only”.

Of more concern than the headline slump into deflation was a drop in the rate of “core” inflation, which strips out volatile food and energy prices, from 1 per cent in March to 0.8 per cent in April. Core inflation was its lowest since 2001 and below forecasts of 1 per cent, while the headline reading of -0.1 per cent was as expected.

The pound fell 1.17 cents against the dollar to $1.5531 and government borrowing costs were down 6 basis points at 1.888 per cent on the weaker result for core inflation.

However, Mr Tombs said core had been “temporarily depressed” by the timing of Easter, which resulted in air fares slumping from 6.8 per cent to -5.3 per cent, knocking 0.1 percentage points off the headline inflation rate.

George Osborne said: “Today we see good news for family budgets with prices lower than they were a year ago.

“As the governor of the Bank of England said only last week, we should not mistake this for damaging deflation. Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.”

Story by London (UK) / The Times


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