Britain could be about to enter brief deflation

Chris Papadopoullos
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Bank of England governor Mark Carney
The UK could enter deflation for the first time since comparable records began when figures are released tomorrow morning.

Yet most economists believe inflation’s venture into negative territory will be short-lived, given that oil and global food prices have halted their declines. The consumer price index (CPI) – the basket of goods used to measure inflation – has not fallen below zero since it began in 1996. Experimental data suggest it has not been negative since 1960.

Economists Martin Beck and Andrew Goodwin from consultancy Oxford Economics said “it is touch-and-go whether inflation drifted into negative territory in April”.

They point to a recovery in petrol prices but also add that earlier oil price falls may still be feeding through to the prices of goods and services. Their prediction is that inflation will be exactly zero, but would not be surprised to see the Bank of England’s forecast of minus 0.1 per cent prove accurate.

Last week the Bank of England (BoE) said it expected inflation to turn negative briefly before recovering later in the year. But it does not expect its two per cent target to be met until 2017.

Economist Samuel Tombs from Capital Economics has pointed out that inflation could be tipped below zero by the fact that Easter was earlier this year. With prices measured in the middle of the month, the effect of higher airline prices over the holiday period is likely to be neglected this year. But Tombs echoed the Bank of England in adding that “deflation is likely to be for one month only”.

Economists widely expect the BoE’s base rate to be held at zero for the remainder of the year.

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