UK hit by deflation for first time in 55 years
The official measure of inflation recorded a fall of 0.1% in the year to April, the first time the price of goods and services in the UK has dipped since 1960.
The Office for National Statistics said 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.
The April figure means the basket of goods and services on which the index is based, cost £99.90 this April compared to £100 in April 2014.
The ONS said the biggest factor dragging prices down came from transport services and most notably air and sea fares – as well as the early date Easter fell this year.
Other notable price falls came from housing and household services, clothing and footwear, furniture, household equipment and routine maintenance; and alcoholic drinks and tobacco.
Chris Williams, chief executive of Wealth Horizon, said: "The UK is now officially experiencing deflation for the first time since March 1960 when prices fell by 0.6% year-on-year. While prolonged deflation is dangerous, the UK is almost certainly going to see the return of inflation in the next few months as the dramatic fall in the oil price and the impact of a vicious supermarket price war fall out of the equation."
So what does deflation mean for you?
When prices are falling, two things can happen. A short period of deflation can have a positive impact on the economy as cheaper prices can boost confidence and spending power. It also means that savings rates aren’t being reduced even further by inflation.
Shaun Port of investment provider Nutmeg said: "We think fears of a damaging period of deflation are overblown. Near-zero or negative inflation is in fact good for growth and spending power, not a sign of impending doom. While wage growth has been slow to pick up, the collapse in inflation has boosted spending power – just like an instant tax cut."
However, if deflation lasts for too long then people are put off spending because they think prices will fall further. And when people stop spending, businesses stop making money and they could be forced to cut jobs and stop investing. This can turn into a vicious circle.
But as Williams pointed out above, there’s cause to believe this bout of deflation will be shortlived.
Port added: "Borrowers need to consider the impact of this on future higher mortgage rates. And savers need to consider the impact of weaker bond prices (higher bond yields) will have on their investment portfolios."
Williams warned that inflation could soon come back with a vengeance. "Investors cannot rest on their laurels," he said. "When inflation does return, it could do so very rapidly, and with interest rates still at record lows, it will become even more important to invest in assets which deliver a return well above the official inflation target of 2%."
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.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).