Supermarket price war and drops in oil prices drag UK inflation down to zero

Tim Wallace
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The supermarket price war is forcing food prices down (Source: Corbis)
Hard-pressed households gained a reprieve in the past year – prices held flat in the 12 months to February, official figures showed yesterday.

Economists now believe deflation is just around the corner, as falling fuel and food prices keep easing the pressure on family budgets.

It is the first time inflation has fallen to zero in the consumer price index’s 25-year history.

Combined with rising wages, the numbers bode well for consumer spending and the wider economy.

Average wages increased by 1.8 per cent in the year to January, indicating workers are at last becoming better off.

“This represents a good form of deflation in which lower global food and energy prices provide a much needed boost to household real income levels, helping to end the real wage squeeze of the past six years,” said PwC’s chief economist John Hawks­worth.

He expects inflation to stay firmly below its two per cent target for the next 18 months.

“The Bank of England’s monetary policy committee is under no immediate pressure to raise interest rates, but they will also be aware that the medium term impact of lower global commodity prices will be to boost the UK economy, potentially pushing up wages and prices,” Hawksworth said.

“We would therefore still expect the first interest rate rise to come by early 2016, with inflation moving back towards target by the end of that year.”

Food prices fell 0.2 per cent on the year, led by dairy products, bread, cereals and chocolate.

Prices also fell across books, toys and games – recreation and culture prices overall held flat on the year.

But the biggest factor pulling down prices was the drop in oil. Motor fuel prices dived by 16.6 per cent on the year.

Although global oil prices have stabilised, economists do not expect inflation to come back soon, as the strong pound combined with a supermarket price war keeps prices down.

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