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Economists on alert for falling prices

Inflation may fall to zero or even turn negative as deflation looms

Oil priceInflation is expected to drop to zero or even go NEGATIVE this week when official prices are unveiled showing that Britain is nearing a period of deflation, or falling prices.

Data for February should show the consumer prices index rising at just 0.1% at best, confirming a warning from the Bank of England governor Mark Carney that the country may be following the eurozone into a deflationary spiral.

In January, annual inflation fell to just 0.3%, but the annual figures were distorted by a rise in petrol prices last month. With oil prices falling again, a 0.1% rise in inflation in February will mean annual inflation is now negative.

Economists and policy makers do not like deflation as it encourages consumers to delay spending in the hope that prices will fall further.

Its advantage for the UK government is that it provides evidence that the cost of living is coming down and that wages are at last outstripping prices. It will also delay any prospect of interest rates rising.

Only last week, the Bank of England chief economist Andy Haldane said interest rates could fall, prompting a fall in the value of the pound.

Howard Archer, chief UK economist at IHS Global Insight, believes inflation could fall to zero while

Sheridan Admans, investment research manager at the Share Centre, said: “This is the month when UK inflation may go negative. In January, annual inflation fell to just 0.3%, but the annual figures were distorted by a 0.5% rise in month on month inflation in February 2014. This particular data will not show up in the annual figures for the year to February 2015. If month on month inflation in February 2015 is 0.1% or less, then annual inflation should be negative.”

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