Mixed Responses as UK Inflation Drops to Zero

The UK’s inflation rate, as measured by the consumer prices index (CPI) measure, fell to zero last month from 0.3% in January – the lowest rate since estimates of the measure began in 1988.

The news received a mixed response. “The latest drop in inflation to 0.0% leaves the UK on the cusp of deflation for the first time in nearly 50 years,” commented Adam Chester, head of economic research and market strategy at Lloyds Bank Commercial Banking.

“Notably, the drop has not been driven by weakness in the economy but by aggressive supermarket discounting, and the feed-through from lower oil prices to forecourt fuel prices. With sterling’s exchange rate pressing down on import costs and retail energy prices set to fall further, inflation looks set to dip briefly into negative territory over the coming months.

“The drop in inflation is good news for consumers and businesses. Falling food and energy prices are easing the pressure on household finances, whilst businesses will benefit from lower fuel prices and strengthen their ability to invest for future growth. For householders and businesses with debt low inflation strengthens the case for the Bank of England [BoE0 to keep interest rates at a record low.”

However, the response from David Lamb, head of dealing at the foreign exchange specialists FEXCO, was more downbeat. “Consumers may be revelling in cheaper prices, but for economists this is a code red moment,” he said. “While there is no surprise at the fall in inflation, both the speed and the scale of the drop are alarming. We are in an oasis on the edge of an abyss.

“[BoE governor] Mark Carney has breezily predicted that though inflation would turn negative in spring, Britain would escape a deflationary spiral. But with inflation in freefall, that assessment is now looking dangerously optimistic.

“It now seems certain that Britain will fall into deflation in March. This is unknown territory, and we should expect policymakers to take drastic action to prevent deflation taking root. The BoE’s chief economist has already raised the prospect of interest rates being cut to the bone to stave off the pernicious effects of long-term falling prices.

“After six straight years at their current historic low, the prospect of interest rates being cut even further is weighing heavily on sterling.”

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