UK inflation dips below zero again

ONS says fall in road fuel cost and a less-than-expected rise in clothing prices are behind latest drop in inflation to -0.1%

Inflation in Britain has dipped below zero for the second time this year, easing pressure on the Bank of England to raise interest rates from their record low.

Smaller than usual rise in September clothing prices & falling motor fuel prices were main factors behind #CPI fall http://t.co/x4rFzgjqul

— ONS (@ONS) October 13, 2015

Official figures showed inflation was down from zero in August to -0.1% in September, pulled lower by cheaper fuel prices. Economists had expected the rate as measured by the consumer prices index (CPI) to hold at zero, according to the consensus in a Reuters poll. But some had predicted inflation could fall into negative territory.

Negative again

Inflation turns negative
Inflation has turned negative again, as shown in this chart of the CPI 12-month inflation rate for the last 10 years. Photograph: ONS

Inflation has been at, or close to, zero since February and dipped into negative territory in April this year when prices fell for the first time in more than 50 years.

Commenting on the latest figures, Richard Campbell of the Office for National Statistics said: “Though CPI has turned very slightly negative this month, the bigger picture is of a broadly flat inflation rate since the beginning of the year. The main downward pressures on CPI came from clothing, which rose more slowly this September than in recent years, and falling petrol and diesel prices.”

There was also some downward effect from household energy bills after a price cut from British Gas.

Even stripping out more volatile prices, such as fuel and food, the so-called core measure of inflation undershot expectations in September. The ONS said the rate held at 1.0%, defying a forecast for a 1.1% reading.

While some have described negative inflation as a sign of economic fragility, the chancellor, George Osborne, sought to play down fears that the UK had slipped into deflation.

Inflation at -0.1% while wages rising at fastest rate in over a decade is a real boost for budgets of working families

— George Osborne (@George_Osborne) October 13, 2015

We shouldn't mistake this for damaging deflation: we remain vigilant and our system is designed to deal with such risks

— George Osborne (@George_Osborne) October 13, 2015

The Bank of England is set an inflation target of 2% by the government, but the rate has been below that since the start of 2014. The low rate reflects sharp falls in global commodity prices, from food to fuel. The ONS said food prices fell by 2.5% and motor fuel prices fell by 14.9% in the year to September.

Against that backdrop, interest rates have been held at a record low of 0.5% for more than six years. Economists see little chance of them being raised until well into 2016.

At the last meeting of the Bank’s monetary policy committee (MPC) last week, only one member, Ian McCafferty, voted for a hike.

Speaking to MPs on Tuesday, he said the effects that pulled the latest inflation number lower appeared to be “transitory”. He told the Treasury select committee that the negative rate would not in isolation “change my view of the last few months”.

But fellow MPC member Jan Vlieghe appeared to see bigger risks that inflation will not recover as quickly to meet the Bank’s 2% target. He also flagged risks to the UK from a global slowdown.

Commenting on inflation indicators, he told MPs: “I am not confident enough right now that they will rise in order to vote for an immediate rate hike. I think we have time. We can wait and see how this plays out and I would want to see a more convincing broad-based upward trajectory before I say, ‘OK, now I am confident enough that we will get to 2% eventually and therefore vote for a rate rise.’”

The Bank’s governor, Mark Carney, has previously told Britons to enjoy low inflation while it lasts and reassured them the UK is not headed for all-out deflation, where widespread price falls become entrenched. The government has repeatedly emphasised the boost to household budgets as wages finally rise faster than prices.

However, economists warn some of the factors keeping inflation low could fade in coming months.

“Even though wages are likely to climb further from here, CPI inflation will probably rise slightly faster, so this is probably as good as it gets for the consumer,” said Alan Clarke, economist at Scotiabank.

Inflation turning negative once again is potentially bad news for savers because it means the maximum amount people are able to put into an Isa could be frozen in 2016.

As increases to the Isa allowance are based on the CPI inflation figure for the year to the previous September, the new data suggests the current Isa limit of £15,240 will remain unchanged next year. A cut in the allowance is possible in theory, though seems highly unlikely. It is possible that Osborne might decide to announce a hike in the autumn statement on 25 November.

September’s CPI figure also affects the basic state pension. The government introduced the so-called “triple lock”, which means the basic state pension rises by either the September CPI figure, growth in average weekly earnings or 2.5%, whichever is highest.

Earnings growth for May to July 2015 is running at a provisional 2.9% compared with a the same period last year, suggesting that people already receiving a full basic state pension would see their weekly income rise from £115.95 to about £119.31 in 2016, said Tom McPhail, head of retirement policy at investment firm Hargreaves Lansdown.

The finalised figure, which will determine how much pensioners receive next year, will be confirmed by the ONS on Wednesday – though there will be no certainty on this issue until after the chancellor has sat down on 25 November, as he could decide to increase this figure or announce other changes.

Contributors

Katie Allen and Rupert Jones

The GuardianTramp

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