Economists say prices will rise
Inflation dips below zero but is due back at 2% this year
Inflation fell to -0.1% in April, the first time that consumer prices had fallen into negative territory since 1960.
Sterling fell by one and a half cents to a one-week low against the dollar and British government bond futures hit a session high after the data was produced by the Office for National Statistics.
However, Bank of England governor Mark Carney (pictured) believes the current level of flat prices will be short-lived and that inflation will return to its 2% target by the end of the year. This is more likely as the oil price rises above the lows of last year.
This was the view shared by economists with some believing inflation may rise above zero as soon as next month because April’s figure was influenced by lower air fares and ferry tickets.
Rain Newton-Smith, CBI director of economics, said: “It’s unlikely we will see falling prices for a prolonged period, as the downward pressure on inflation from lower oil prices fades.
“Falling oil prices has been good news, boosting household incomes and lowering costs for businesses outside of the North Sea oil sector, which is being hit.
“With inflation set to remain below 1 per cent this year, a rise in interest rates anytime soon seems off the cards. Rates are likely to remain low into next year and beyond, continuing to help the domestic recovery.”
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.
“Deflation can be a chronic problem where it represents a lack of consumer confidence and an unwillingness to spend. This danger is very real in some parts of southern Europe, but is not even a distant threat in the UK. While deflation does cause the cost of debt to rise in real terms, the benefits to the wider economy of a period of falling prices far outweigh any downsides.”
David Lonsdale, director of the Scottish retail consortium, said: “Falling shop prices are leading to a corresponding increase in the spending power of Scottish households, with retailers keen to capitalise on the opportunity this presents. The fact that food price inflation is at a record low will be especially welcome to low income households who typically spend proportionally more of their family budget on groceries.”
Andy Scott of foreign exchange specialists Hi-FX said Britain was not experiencing deflation but the current zero inflation was having an impact on currency. “We expect to see sterling strengthen against the dollar this year to levels back above 1.60 as the weak U.S. economic data delays the Federal Reserve from hiking rates,” he said.
“Against the euro, we expect sterling to continue to encounter resistance above the 1.40 area and to head back towards 1.30 as the euro continues to benefit from a pickup in economic activity across the euro zone, supported by the ECB’s Q.E. programme and the weaker currency.”
Henry Dixon, fund manager at Man GLG said: “When some of the short-term factors such as the fall in the oil price come out of the equation, it could overshoot the official target and climb back up near to 3% by January.”
Guy Foster, head of research at Brewin Dolphin, said: “The risk of a deflationary spiral is low given that consumers are already experiencing rising prices at the petrol pump.
“Overall underlying demand remains very much in goldilocks territory (not too hot, not too cold). There is nothing in this release which will alarm investors or policymakers and the pace of inflation will pick up from here.”
Chris Williams, CEO, Wealth Horizon, said: “While prolonged deflation is dangerous, the UK is almost certainly going to see the return of inflation in the next few months as the dramatic fall in the oil price and the impact of a vicious supermarket price war fall out of the equation.
“Nonetheless, investors cannot rest on their laurels. When inflation does return, it could do so very rapidly, and with interest rates still at record lows, it will become even more important to invest in assets which deliver a return well above the official inflation target of 2%.”