Inflation sticks at 0%

14 April 2015

The UK's consumer prices index (CPI) remained flat at 0% in March as the economy staves off deflation.

Meeting analysts' expectations, UK inflation remained at 0% over the 12 months to 31 March, as the country continues to be affected by falling oil and food prices.

However, the largest downward contributions to inflation in March came from clothing and footwear, housing and household services, and restaurants and hotels, while the largest upward contributions came from transport and food - indicating that the downward trend in these sectors may be petering out.

Short-lived effect

Commenting on the upward movement in fuel and food costs, Maike Currie, associate investment director at Fidelity Personal Investing, says: "Food, fuel and energy are all essential items to the consumer. No-one is going to delay their purchases of any of these in anticipation of future price falls. So the effect of these factors is therefore likely to be relatively short-lived.

"It is important for investors to distinguish between unhealthy deflation, a self-perpetuating spiral of falling prices, and disinflation, a slowdown in the rate of inflation. Don't confuse the two. Disinflation is good news – it lines the pockets of consumers and boosts the economy," Currie explains.

Despite this uptick in fuel and food prices, however, a slowdown in the rate of core inflation – which strips out the effect of the latter two groups – indicates that the UK may be battling with other deflationary factors.

Core inflation fell to 1.0% in the 12 months to 31 March, down from 1.2% in February and undershooting analysts' expectations that it would remain stable.

Rate hike unlikely

Commenting on the unexpected slide, Barclays Stockbrokers warns of further delays to a rise in interest rates. "Despite headline CPI inflation coming in as expected, weakness in core prices will undoubtedly keep the Bank of England (BoE) on its toes and likely challenge any attempt at an early rate hike," it says.

"The BoE made clear that its primary concern is to avoid low inflation becoming entrenched, and even highlighted that it stands ready to take additional measures if needed. Such an accommodative and cautious stance will prevail in the coming months and be lifted only if inflation recovers convincingly in the second half of this year."

Ben Brettell, senior economist at Hargreaves Lansdown, adds that he does not expect the BoE to begin to raise interest rates until mid-2016 at the earliest. He adds: 'Thereafter the process of raising rates is likely to be gradual, with the Bank mindful of high household debt levels (including mortgages) and the potential impact of a stronger pound.

"The interest rate swap market currently suggests interest rates will average less than 1.25% over the next five years, and less than 1.65% over the next ten years."

This article was written for our sister website Money Observer

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