Price growth in the UK has hit the lowest level since 2000, as the sharp drop in global oil prices fed through to petrol pumps while supermarket price wars have cut consumers’ shopping bills. Here is what City economists and other experts made of the surprise news, looking at the impact on consumers, businesses and monetary policy.
Melanie Baker at Morgan Stanley
Flirting with Deflation: We expect CPI inflation to decline to 0.3% in January and to only 0.1% in February amid sharp further downward pressure from energy components.
While good news for the consumer, this increases the risk of deflation and a delay to our call for the first rate hike in the fourth quarter.
We continue to expect a first rate rise in the fourth quarter but, with headline inflation low and some inflation expectations measures having drifted lower too, risks are growing for a later first rate rise.
Allan Monks at JP Morgan
Further oil price slide and announced utility bill cut point to a lower CPI trough. We now look for the CPI to hit -0.1% year-on-year in February, with the first quarter averaging zero. And we expect later tightening from the Bank of England, starting in the fourth quarter instead of the third quarter.
Philip Shaw, chief economist at Investec
We now take the view that CPI inflation will enter negative territory, albeit for a couple of months during the spring. This could be more prolonged in the event of continued downward pressures on crude oil costs for a few more months.
We would hesitate to term this a period of deflation, as we consider deflation to be a sustained period of widespread falling prices, and not a few months where energy costs drop sharply. Note from today’s data that despite the sharp downward trajectory of the headline rate of inflation, the ‘core’ measure (i.e. CPI ex-food, energy, tobacco and alcoholic beverages) actually ticked up a touch to 1.3% from 1.2%.
Our central call remains that the monetary policy committee will raise rates in August this year.
Rob Wood, chief UK economist at Berenberg Bank
This is very good news indeed for UK consumers and the UK economy. Stepping back a little, two thirds of the 1.5 percentage point fall in inflation since December 2013 is explained by energy and food prices. Most of the remaining third comes from cheaper imported goods reflecting sterling’s appreciation until last summer.
The UK is seeing good rather than dangerous disinflation – cheaper bills for imports rather than very very low domestically generated price pressure. Low inflation driven by cheaper petrol, food and import costs is unambiguously positive for the UK. It represents a big tax cut for consumers, who will be seeing real average earnings growth in excess of 1.5% year-on-year within a couple of months. Just the direct effects of lower petrol prices will put upwards of an extra £8bn a year in consumers pockets, and potentially much more if utility bills and other prices (air fares, catering etc) respond to cheaper oil and commodity prices.
James Knightley, UK economist at ING
CPI is likely to fall further given the ongoing declines in the oil price and the highly competitive food retail environment. Consequently, the Bank of England has plenty of room to leave monetary policy ultra-loose. Nonetheless, the BoE will likely emphasise that they look through temporary shocks and instead focus on the medium-term inflation threat, since this is their remit – targeting inflation at 2% in two years’ time. They did this when CPI peaked at 5.1% in September 2011, keeping policy ultra-loose and continuing to buy government bonds as part of their quantitative easing programme.
Meanwhile, there are growing signs that wages are finally starting to respond to a tightening in the labour market. Income Data Services reports that pay awards are rising and with the National minimum wage having just increased by 3% we are looking for a similar rise in pay more broadly this year. BoE hawks, Martin Weale and Ian McCafferty continue to vote in favour of immediate policy tightening, arguing that it is “desirable to anticipate labour market pressures by raising Bank Rate in advance of them”. We suspect that these views will gradually spread through the BoE as rising employment and strong growth offer reassurance on the UK’s economic progress. Indeed, real household disposable incomes are likely to grow by around 3% this year as wage rises, tax changes and low inflation combine to create a more favourable environment for consumer spending. This should help nudge up domestic driven inflation pressures whilst also helping to offset weakness in exports to the moribund Eurozone. Consequently, we remain in the camp favouring an August rate move from the BoE.
David Kern, chief economist at the British Chambers of Commerce
The historically low inflation figure in December 2014 confirms that inflationary pressures in the UK are very low. Although the fall between November and December was exaggerated by the increase in gas and electricity prices a year ago, it is likely that CPI inflation will remain below 1% in 2015.
However, concerns over deflation pressures are grossly exaggerated and risk undermining business confidence. And these figures show that inflation in the services sector – which accounts for some 80% of the UK economy – remains persistently above 2%.
The main factor which counts for the low level of goods inflation, the fall in energy and goods prices, is positive as it boosts consumers’ disposable income and makes it easier for businesses to devote resources to investment. On the basis of current trends we believe that the MPC can afford to wait until 2016 before considering a rate rise.
TUC general secretary Frances O’Grady
0.5% inflation shows how fragile the economy is, not just in the UK but also globally.
While low inflation means we are finally seeing real wages start to rise, it will be many years before they are restored even to their pre-crisis levels. Seven years of falling real wages have undermined incomes and spending power; and the threat of slipping into deflation is very real. It’s a very dangerous time for the chancellor to be proposing a new round of austerity, which could plunge the economy back into recession.
We need a strong and sustainable wages recovery, built not just on falling inflation, but on higher pay settlements and more decent, full-time jobs.
Shabana Mahmood, the Shadow Treasury minister
Plummeting global oil prices are the reason why the rate of inflation is falling here in Britain. But wages continue to be sluggish and the squeeze on living standards since 2010 means working people are £1,600 a year worse off under this government.
And falling energy costs are still not being fully passed on to consumers. That’s why Labour will bring in new powers for the regulator to cut bills and force energy firms to pass on savings to consumers. We’ll put our plan to a vote in parliament on Wednesday and urge Tory and Lib Dem MPs to drop their opposition to our reforms.
Labour’s economic plan will also ensure we earn our way to higher living standards for all, not just a few at the top. Our plan to tackle the cost-of-living crisis and for more good jobs is also a key part of our tough but balanced plan to get the deficit down.
Miles Gibson, Head of UK Research at CBRE
Falling oil prices and gas and electricity costs being removed from the inflation calculation have all but ended the likelihood of a base rate rise before the end of this year. As a result businesses will feel a double impact of continued low borrowing costs, particularly for property, and the boost that real term wage growth can give the economy through enhanced consumer purchasing power. Both are key for a robust recovery and provide hope to consumer-dependant sectors such as grocery and clothing retail which are not yet enjoying the fruits of economic growth as much as some other sectors.