Ashraf Laidi is chief global strategist at City Index, says Yes
As UK inflation extends its hold in zero territory, it may only be a matter of time before core inflation (stripping out volatile factors like food) creeps closer to zero. A continuation of this trend may imply that disinflationary pressures coming into the production pipeline could extend into the retail space. The latest figures justify some Bank of England members’ references to deflation risks. Despite the pound’s 14 per cent decline against the dollar from last summer’s highs, it appreciated by more than 17 per cent against the euro over the same period – justifying emerging worries of importing deflation from the Eurozone and exacerbating deflationary pressures at home. And despite established deflation in the Eurozone, the UK two-year yield advantage over comparable German bunds has in fact fallen from 1.4 per cent in February to 0.79 per cent, reflecting the market’s increased pricing of prolonged decline in UK price growth – even relative to the Eurozone.
Ben Brettell is senior economist at Hargreaves Lansdown, says No
I don’t believe that the fall in core inflation should prove a cause for concern, despite hitting a nine-year low. Stripping out the volatile food and energy components offers a clearer picture of the underlying pricing pressures in the economy. While these are weak, they are not worryingly so. It looks likely that a steady expansion in demand will see spare capacity in the economy continue to be eroded over the next couple of years, supported by lower oil prices, and core inflation ought to start rising again in the medium term. In the meantime, low but positive core inflation could be regarded as a good thing – it means that there is little chance of the economy overheating and inflation getting out of control. This would force the Bank of England to raise interest rates more aggressively than it would ideally want to, risking damage to debt-laden households and a stronger-than-desired pound. Low inflation will allow the Bank to raise rates in a controlled fashion.