UK inflation falls to 0%

24 March 2015

Inflation has fallen to 0% for the first time since it began to be measured by the consumer price index in 1997, edging the UK closer to deflation.

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.

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