Why businesses and employees are cheering low inflation

Jessica Morris
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Employees have something to celebrate (Source: Getty)

Low inflation will benefit businesses which are likely to pass gains onto employees through wage hikes, businesses have said.

James Sproule, chief economist at the Institute of Directors said: "We welcome the news that inflation has once again fallen. It is particularly encouraging that this has been driven by falling fuel costs. This is putting extra spending power directly into people's pockets and is acting as a further catalyst to economic growth."

"Looking to the longer-term, we are encouraged that IoD members are planning pay rises for their staff in 2015. In the majority of cases these will be tied to improved corporate performance. This is the sort of responsible decision which will ensure economic growth is sustainable."

Figures released today by the Office for National Statistics today showed prices failed to increase - or, indeed, decrease - at all in February. This means Britain is one step closer to deflation which is when general price levels actually start falling.

This was more than economists expected, and was the lowest reading since current records began in 1989. Closest comparable figures showed Britain's main inflation rate last dipped into negative in March 1960.

"Looking ahead, we still see potential for inflation to slip further in the short term, and we expect to see a small but temporary negative CPI print in March," Timo del Carpio, European Economist, RBC Capital Markets, said.

And so, in addition to plumper pay packets, British consumers will find they are also winners, as the price of a typical food shop or tank of petrol, as well as laptops and tablets, falls.

In addition to this, the strong sterling, which soared to a seven-year high against the euro earlier this month, will also help push down prices by making euro-denominated imports cheaper.

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