First negative inflation since 1960
PUBLISHED: 10:29 19 May 2015 | UPDATED: 10:29 19 May 2015
Inflation turned negative for the first time in more than half a century in April, official figures showed today.
What does negative inflation mean?
Official figures show Consumer Price Index (CPI) inflation turned negative in April. What does this mean?
• Has this ever happened before?
CPI has never turned negative since comparable records began in 1989. According to an experimental data series by the Office for National Statistics (ONS) going back to 1950, it was last negative, at minus 0.6%, in March 1960.
• Would it mean the pound in my pocket is worth more?
Yes. CPI at minus 0.1% means a basket of goods worth £100 a year ago now costs £99.90. Low inflation has been driven by falling petrol and grocery prices.
• Is there a downside?
Sustained falling prices could mean shoppers putting off purchases and firms delaying investment, while mortgages become less affordable, especially if wages drop. But this is thought unlikely, with temporary causes such as low oil prices likely to fade.
• How will this affect interest rates?
The Bank of England must try to return inflation towards its target of 2% so low CPI should mean rates at 0.5% for longer. Deeper or more prolonged negative inflation could create growing speculation of interest rates being 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. Tom Stevenson, investment director at Fidelity Personal Investing, said: “Households should enjoy the cheaper cost of living and real earnings growth while it lasts. Inflation is expected to pick up towards the end of the year.”
The Consumer Price Index (CPI) measure of inflation dipped to minus 0.1pc, according to the Office of National Statistics (ONS).
It is the lowest rate on record and comes after two previous months of zero inflation.
Estimates of past CPI rates suggest it was last negative in March 1960 when Harold Macmillan was prime minister and Dwight Eisenhower was in the White House.
The figure of minus 0.1pc is in line with projections by the Bank of England in its quarterly Inflation Report last week.
The Bank said it expected inflation to fall below zero before picking up “notably” towards the end of the year as the effect of lower oil and food prices fades.
Today’s figures showed “core” inflation excluding volatile energy, food, alcohol and tobacco prices was also subdued. At 0.8pc in April, it was at its lowest level since March 2001.
Food prices fell 3pc year on year in April, the fourth month of deflation at around that level - an unprecedented run of prices falling at such a pace in the sector.
Fuel prices rose on the month, with a litre of petrol 2p more expensive than in March, meaning its downward pull on the year-on-year rate was smaller than before.
But the timing of Easter dragged down on CPI as air and sea fare rises in April were much lower than in the same month last year.
CPI calculated to two decimal places was minus 0.12pc, down from minus 0.01pc in March.
RPI, a separate measure which includes housing costs, was unchanged at 0.9pc.
Last week, Bank of England governor Mark Carney wrote to the Chancellor for the second time this year to explain why CPI remained more than 1pc off its 2pc target.
He said he expected to write more such letters in coming months but stressed that a temporary period of falling prices should not be mistaken for a damaging spiral of “deflation”.
Such a prospect might have unwelcome consequences such as households and businesses putting off spending and investment.
An experimental data series created by the ONS indicates that CPI was last negative in March 1960, at minus 0.6pc.
Chancellor George Osborne said: “Today we see good news for family budgets with prices lower than they were a year ago.
“As the governor of the Bank of England said only last week, we should not mistake this for damaging deflation.
“Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.
“Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them should they arise.”