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Deflation in the UK
Last week saw the announcement that UK inflation, as measured by the Bank of England's benchmark measure the consumer price index (CPI), had fallen below zero. This is the first time that this has occurred since the data series began in 1996. A year on year fall to zero had been expected but the actual figure was a decline of 0.1%. Core inflation (excluding food & energy) also slowed to 0.8%, which represents the lowest rate of growth since 2001.
The main drivers behind the fall in inflation were again drops in food and energy prices, with the former falling 3% from a year earlier whilst fuels and lubricants fell 12.3%. The fall of CPI below zero however is expected to be temporary as the fall in the oil price eventually 'washes through' the data and with oil having recently recovered from its low point. The Bank of England forecast that inflation will average 0.6% this year before returning to the 2% target by the second quarter of 2017.
Market commentators see this drop into deflation as temporary and do not see it as a threat the UK economy. Instead the fall in the rate of inflation is being seen as a potential stimulus, with consumers, coupled with real wage inflation and lower unemployment, feeling more confident to spend.
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