UK inflation falls to 0%
It fell from 0.3% in January to zero in February, mainly as a result of falling oil and food prices. Economists had predicted inflation would fall to 0.1%, but were surprised by fuel prices falling 16.6% in the year to February and food prices dipping by 3.4% during the same time.
Prime Minister David Cameron called it, "good news for family budgets and a sign our long term plan is working."
With inflation at 0%, consumers will see their household income go further, making them more confident and more likely to spend. Wage growth will also now outstrip inflation, following years of stagnant salary growth.
Economists are broadly positive about falling inflation – and even the prospect of a short period of deflation - because the oil price is already showing signs of rising, while food price falls will be temporary. They would not be so positive if falling inflation could be directly linked to weaknesses in the UK economy.
Falling food and fuel prices
Ben Brettell, senior economist at Hargreaves Lansdown, explained: "The majority of the fall in inflation can be explained by falling motor fuel and food prices. These effects should prove temporary and drop out of the rolling twelve-month calculations in due course. For this reason the Bank's governor Mark Carney believes Britain is not heading for a dangerous ‘Japan-style' deflationary spiral, and argues cutting interest rates in response would be foolish."
Howard Archer, chief European and UK economist at IHS Global Insight, added: "Any deflation in the UK resulting primarily from much reduced oil prices and falling food prices is good news for the economy as it is boosting consumers' purchasing power while not carrying the risks that more generalised deflation can do."
Prolonged deflation, however, can be dangerous for an economy because it causes companies and consumers to delay spending in the hope of further price falls in future – which can lead to something of a vicious circle and continued deflation.
Maike Currie, associate investment director at Fidelity Personal Investing, said: "Flat inflation is good news for homeowners because mortgage payments stay low, but bad news for savers who need to seek income wherever they can as the returns on cash just doesn't cut it."
That said, every savings product offering a positive interest rate will now beat inflation, though not all will beat inflation after tax is taken into account.
Economists were broadly in agreement that an interest rate rise is not likely in the short-term, but remains on the cards by late-2016 or early-2016.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.