Inflation hits zero

The UK’s inflation rate fell unexpectedly to 0% in February, the lowest since records began, figures released today (March 24) show.

Lower prices for food (driven by pressure on the “Big Four” from discounters led by Aldi and Lidl) and utilities and a slump in oil prices helped to cut the rate from 0.3% to zero in January, official figures show.

February’s figure is the lowest rate of Consumer Prices Index (CPI) inflation since estimates of the measure began in 1988, although it is thought that inflation in the late 1950s and early 60s were close to, or even below, zero. The drop in the CPI measure was sharper than many analysts had expected, with most expecting a rate of 0.1%.

Low inflation, as well as making consumers’ wallets go further and boosting confidence, could support UK economic growth, lobby group British Chambers of Commerce (BCC) said.

“We remain convinced that there is very little risk of a long period of deflation,” said David Kern, BCC chief economist. “Inflation in the service sector, which accounts for 80% of the UK economy [and includes retail and foodservice], remains firmly above the government’s 2% target, and core CPI inflation in February was 1.2%. Together with higher earnings, lower inflation is boosting people’s spending power, and will contribute to economic growth in the year ahead,” he said.

Rain Newton-Smith, director of economics at the CBI, said: “Despite inflation dropping to zero, it is unlikely we will see falling prices for a prolonged period, particularly as the pressure from lower oil prices fades. But with the Monetary Policy Committee still alert to the risk of very low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

Last week, the Bank of England’s chief economist Andy Haldane said rates were “as likely to need cutting as raising” in the immediate future.

Unlike the euro zone, where prices are already showing year-on-year falls, most economists think British consumer demand will remain firm in the face of falling prices, due to robust employment growth and signs of a pick-up in wages.

Cuts in utility bills from the big energy companies, which have just started to kick in, may help push prices even lower in March, economists said.

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