Consumer prices fell 0.1% in the year to April, with the UK officially and unexpectedly entering deflation.
Most people in the UK are a lot more used to inflation — when prices rise. Tuesday’s figures mean that on average, prices are falling in the UK for the first time in at least 55 years.
Analysts were expecting prices to stay flat year-on-year, with 0% inflation.
Core prices, which strip out the effects of volatile items like food and energy, were expected to rise by 1%.
But in fact, core prices rose by just 0.8%, the lowest figure since 2001.
The Office for National Statistics (ONS) estimates that the UK had some brief periods of deflation in the late 1950s and 1960. The last time the UK had a prolonged period of deflation was way back in the 1930s, in the aftermath of the Great Depression.
Here’s how that looks:
Economists are often worried about a period of prolonged deflation — which can become debilitating and self-reinforcing. When prices are falling perpetually, it makes debts harder to pay off, since the past value of the debt is constantly rising.
That’s a problem when deflation sets in for longer periods of time — as it did in Japan for much of the last quarter of a century, and in most advanced economies in the 1930s.
But there’s not so much concern about what’s happening in the UK right now. Capital Economics’ Samuel Tombs had this to say in a note:
Looking ahead, though, the UK’s deflation is likely to last for one month only. CPI inflation should return to positive territory in May, as the effect of the shifting timing of Easter ceases to depress it and as the negative contribution from energy and food prices starts to fade.
Meanwhile, there are still few signs that very low inflation is having malign economic effects — consumers are undertaking, not delaying, purchases and wage growth is picking up. Nonetheless, the pound’s recent appreciation and the scope for productivity to recover suggests that it could still be another couple of years before CPI inflation returns to the 2% target. Accordingly, consumers can continue to look forward to healthy increases in their spending power for some time to come.
Deflation is most worrying if it starts translating into wages and reinforcing itself. For example, imagine a shop’s prices are falling, and it starts to pay its staff less since there’s not as much money coming in. On an economy-wide level, that sort of thing can have a knock-on effect (with prices in shops falling further with wages). Japan got locked in that sort of cycle, but most British economists agree that’s not what we’re seeing here.
Most of the drop in average prices is caused by the plunge in the cost of oil since the end of last year — which slashed the cost of petrol. Because that keeps more money in peoples’ pockets, even the governor of the Bank of England described it as an “unambiguous net positive” for the UK.
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