UK Inflation for Dummies

Denial, anger, bargaining, depression and acceptance used to be the five stages of buying petrol. Many consumers used to double the value of their car every time they replenished their tanks, however, as we have documented in recent weeks here on The Commercial Cartel, the world has been ‘put-in’ their hard earned cash back into their bank accounts due to the economic whirlwind instigated by the oil crisis.

Reflecting the change in monetary momentum, the rate of UK CPI (‘Carbohydrate Protein Ingestion’, lol joke, ‘Consumer Prices Index’) inflation fell from December’s 0.5%, to 0.3% in January, a record low. The price of oil has been having a bit of a nightmare recently, hitting a near six-year low below $45 a barrel last month. Resembling the Game of Thrones’ War of the Five Kings, supermarkets have been engaged in price combat resulting in lower food costs. Notably, food and non-alcoholic drink costs, pushed down by low commodity prices, fell 2.5 percent, the biggest drop on record.

In its latest economic outlook, the Bank of England said the slump in oil prices and falling food prices was likely to push inflation to zero in the second and third quarters of 2015, probably dipping into negative territory for one or two months this spring. The last time headline inflation was negative in Britain was March 1960, according to the closest comparable data from the Office for National Statistics. Paul Hollingsworth, UK economist at the think tank Capital Economics, underscored this concern, stating “that a brief period of deflation is imminent”.

The Bank of England’s governor Mark Carney has said interest rates could be cut further from historic lows of 0.5 per cent if low inflation becomes entrenched. Nonetheless, Carney stressed that the UK isn’t risk of falling into a deflationary spiral, as lower prices will actually lift wage growth and consumer spending, and in turn buoy economic growth. The Bank also revised upwards its forecasts for growth in 2016 and 2017.

Indeed, easing inflation could delay a first Bank of England interest rate rise since the financial crisis, however for that to happen, the price falls would have to spread beyond food and energy and show signs of becoming self-reinforcing. However, the data offered little evidence of that.

Stripping out energy and food, prices rose last month by 1.4 percent, a three-month high. “There is certainly no sign of the systemic deflation that took a grip on Japan in the 1990s,” said John Hawksworth, chief economist at accountancy firm PwC. Chancellor George Osborne said: “Today we see the lowest CPI inflation ever – a milestone for the British economy.” A pre-election blessing, one must acknowledge. He continued by asserting that the recent figures demonstrate “the clear choice between a long-term economic plan that’s delivering stability and rising living standards, and the chaos of the alternatives.” Uh oh, low blow.

Expect the Conservatives to be ‘labouring’ these points for the foreseeable future in the run up to the elections.

 

By Garry Caprani 

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