19 May 2015

UK inflation turns negative – the key questions

UK consumer prices turned negative in April for the first time, falling to -0.1 per cent. Good news for consumers – but is there a downside?

When did this last happen?

Comparable records began in 1989, since when the inflation rate has never turned negative.

An experimental data series by the Office for National Statistics (ONS) going back to 1950 shows that inflation was last negative – at minus 0.6 per cent – in March 1960.

Bank of England Governor Mark Carney predicted in February that inflation could fall below zero per cent at some during during spring 2015.

So is the pound in my pocket is worth more?

Yes. Today’s figures mean a basket of goods worth £100 a year ago now costs £99.90. Low inflation has been driven by falling petrol and grocery prices.

What are the disadvantages?

If prices continue to fall, shoppers could be put off purchases and firms could delay investment. Meanwhile, mortgages could become less affordable, especially if wages drop. But with low oil prices likely to fade, such a scenario is unlikely.

How will this affect interest rates?

A low consumer prices index should mean rates at 0.5 per cent for longer. If negative inflation continues, there is a possibility that interest rates could be cut even further.

How long will this period of deflation last?

A rebound in oil prices and the stability of global food prices mean it is likely to be short-lived. Analysts predict that inflation will pick up towards the end of the year.