Britain enters into deflation

BRITAIN has experienced its first deflationary period for 55 years, new figures have shown.

The Consumer Prices Index (CPI) fell by 0.1% in the year to April 2015, compared to no change (0.0%) in the year to March 2015.

This is the first time the CPI has fallen over the year since official records began in 1996 and the first time since 1960 based on comparable historic estimates.

The largest downward contribution came from transport services – notably air and sea fares, with the timing of Easter this year a likely factor.

The Office for National Statistics said in the year to April 2015, food prices fell by 3% and prices of motor fuels fell by 12.3%. In both cases, the falls are smaller than in the year to March 2015 but the two groups still provided the largest downward contributions to the 12-month rate.

In total, the food and motor fuels groups reduced the CPI 12-month rate by approximately 0.7 percentage points.

Greg Lowson, president of Birmingham Chamber, said the move into deflation continued the trend in falling prices occurring over the past few months.

“In one respect this is good news to businesses, since it increases the spending power of consumers,” he said.

However, the cause for concern is that where a fall in prices happens across all sectors of the economy, this could result in consumers and businesses putting off spending decisions, because they know prices will be lower in the future, he added.

“The recent fall in CPI is the result, according to the ONS, of a reduced contribution from transport services, particularly air and sea fares. This would indicate ‘disinflation’, rather than deflation, which affects only some sectors of the economy,” said Lowson.

“With the downward pressure of oil prices fading, disinflation in this sector is unlikely to continue.” 

Rain Newton-Smith, CBI Director of Economics, said: “Inflation turned negative in April with the lowest reading since the 1960s. But it’s unlikely we will see falling prices for a prolonged period, as the downward pressure on inflation from lower oil prices fades.

“Falling oil prices has been good news, boosting household incomes and lowering costs for businesses outside of the North Sea oil sector, which is being hit.

“With inflation set to remain below 1% this year, a rise in interest rates anytime soon seems off the cards. Rates are likely to remain low into next year and beyond, continuing to help the domestic recovery.”