UK inflation falls to zero for first time since 1934

London

INFLATION in the United Kingdom fell to zero in February, the first time in eighty one years.

Several economists forecast that the UK would slip into deflation. Indeed, the year 1934, when inflation was last zero, followed a lengthy period from 1921 to 1933 when Britain experienced falling prices. The big question is whether good inflation, ie falling oil and other raw material and consumer goods prices, could slip into bad deflation, notably a contracting economy, similarly to the Great Depression of the 1930s. There are currently no signs that this will happen. The UK's growth rate is 2.5 per cent and there has been vigorous asset price inflation, notably house and apartment price rises, though in the past few months, the appreciation has abated. Also, medical and other service costs have been rising.

The decline in the consumer price index (CPI) from 1.9 per cent last June to zero was predicted last month by the Bank of England (BOE) which forecast that the CPI could turn negative in the spring. The zero level is the result of falling oil prices, a supermarket price war and cheaper computers, washing machines, other electrical goods, furniture, books, toys and games. In response, the pound slipped by one cent to 1.487 against the US dollar and weakened against the euro which rallied in the past week.

The FTSE 100 stock market index, which is now over 7,000 points, rose to a new record as participants took the view that the BOE would slash interest rates further.

Last week, the BOE's chief economist Andy Haldane said that the next move in the official interest rate was at least as likely to be down as up - because of the growing risk that inflation would remain well below the 2 per cent target for longer. The UK bank rate is currently 0.5 per cent and, on the news, bond yields dipped slightly. Two-year gilts (sovereign bonds) are on yields of 0.38 per cent, five-year, 1,12 per cent, 10-year bonds, 1.5 per cent, and thirty-year gilts, 2.28 per cent.

Low inflation could support UK economic growth, the British Chambers of Commerce (BCC) said. But David Kern, chief economist, remains "convinced that there is very little risk of a long period of deflation".

"Inflation in the service sector, which accounts for 80 per cent of the UK economy, remains firmly above the government's 2 per cent target," he said, adding: "Together with higher earnings, lower inflation is boosting peoples' spending power, and will contribute to economic growth in the year ahead."

Rain Newton-Smith, director of economics at business lobby group the CBI, agreed that "it is unlikely we will see falling prices for a prolonged period, particularly as the pressure from lower oil prices fades".

Indeed, the core inflation rate - the rate of inflation excluding goods with volatile price movements, notably energy, food, alcohol and tobacco - was 1.2 per cent in February, 1.2 percentage points higher than overall inflation.

"As in most recent months, this indicates that most of the downward pull on inflation has come from price movements for goods excluded from the core calculation, notably motor fuel and food," stated the Office of National Statistics.

Chancellor of the Exchequer George Osborne crowed that zero inflation was "good news for families" and that voters should stick to the Conservatives.

Back in the 1970s under Labour, inflation hit 24 per cent and when former Tory leader Margaret Thatcher came to power in 1979, inflation briefly touched 22 per cent. Since then the inflation rate with occasional upward moves has been on a steady path downwards.