Britain's Inflation Nears Zero

Consumer price inflation is likely to have fallen to a new record low of 0.2 per cent in February, moving Britain closer to deflation.

Britain’s inflation rate is close to zero, official figures will reveal this week, intensifying the debate on interest rates and putting the economy on track for its first spell of deflation in more than 50 years.

Figures to be released on Tuesday are likely to show the annual rate of consumer price inflation dropped to 0.1% or 0.2% last month, driven down by sharp falls in energy and food prices. Economists now think Britain will dip into deflation this year for the first time since a temporary bout in 1960.

The threat of deflation looms as the stock market races ahead, buoyed by a flood of investors. The FTSE 100 index, which tracks the value of Britain’s largest listed companies, finished the week at 7,022.51, the first time it has passed the 7,000 threshold. Analysts said low returns on other investments — some sovereign bonds now have negative yields — had pushed money into shares.

Economists had forecast the Bank of England would increase interest rates later this year. Low inflation, however, has prompted a debate about whether rates might be cut from the record low of 0.5%. Andy Haldane, the Bank’s chief economist, moved the markets last week by saying the next move was as likely to be down as up.


The Bank has warned that inflation is likely to turn negative in the coming months, though Mark Carney, the governor, has insisted that this is likely to be temporary. While reluctant to admit the possibility of a rate cut, he has conceded that sterling’s strength against the euro, which will push down the prices of some imports, could delay any upward move.

“Our inflation forecast is 0.1%, from 0.3% in January,” said Victoria Clarke of the stockbroker Investec. “Inflation could fall further and even turn negative in the spring, with British Gas’s 5% price cut set to hit the March numbers.”

Howard Archer of the forecaster IHS Global Insight said: “Given the weakness of oil and food prices, consumer price inflation may well test zero during the next few months and it will likely remain below 1% to the end of the year.”

The Office for Budget Responsibility last week cut its inflation forecast for 2015 to just 0.2%, down 0.9 percentage points on its December forecast. The independent fiscal watchdog expects real disposable incomes to show their biggest rise for well over a decade as a result.

The OBR does not expect the government’s 2% inflation target to be hit until 2019, two to three years later than the Bank has forecast.


Markets are torn between whether the boost to spending power will give the Bank reason to begin raising rates, or whether very low inflation will help prevent a recovery in pay settlements, which the Bank thinks is necessary to get back to 2% official target.

Michael Saunders, an economist with Citi, expects Bank rate to stay at 0.5% this year, but to reach 1.5% by the end of 2016 and 2.5% at the close of 2017, alongside a gradual unwinding of the Bank’s £375bn of quantitative easing.

But Alan Clarke of Scotiabank said next year would not be an easy time to begin raising rates, given that official forecasts point to a significant fiscal tightening no matter which party is elected on May 7.

Source: The Sunday Times/OTCEEER


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