UK inflation rate falls to zero in February

Posted by Tom Line in Credit Crunch on 26 March 2015 - Tom worked as a Credit Analyst at checkmyfile until 2015

The rate of inflation hit 0% in February - the lowest reading since records began in 1988 according to the UK’s mechanism for recording inflation, the Consumer Prices Index (CPI). In January, the CPI recorded a reading of 0.3% and analysts expected it to drop to 0.1% in February. However, a continued supermarket price war, low oil prices and cheaper toys and books attributed to the greater than expected decrease.

George Osborne said zero inflation was “a first for the British economy” and good news for family budgets.

Analysts now expect the CPI to report deflation in the coming months. Ben Brettell, senior economist at Hargreaves Lansdown, said the UK "took another step towards deflation" in February.

"It looks likely the rate will drop below zero at some point in the coming months, and hover around zero for most of the year," he added.

Deflation means that the general level of prices are falling consistently over a sustained period of time. Whilst this may sound like good news, it could lead to decreased spending as consumers wait for prices to fall further. This may then exacerbate deflation, further having a negative impact on the economic recovery.

The British Chambers of Commerce (BCC) believes, however, that low inflation could support UK economic growth and that the risk of sustained deflation is a small one. David Kern, BCC chief economist, points out that "Inflation in the service sector, which accounts for 80% of the UK economy, remains firmly above the government's 2% target”.

British people should feel slightly better off as inflation remains consistently below wage growth which, according to the latest figures from the Office for National Statistics, grew at an annual rate of 1.6% in the three months to January, excluding bonuses.

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