Deflation looms
Feb 18 2009
Living costs gauged by the Retail Prices Index (RPI) show the lowest annual rate of inflation in nearly 50 years.
According to the index, year-on-year inflation slowed to 0.1 per cent in January, down from 0.9 per cent in December.
However, the Consumer Prices Index (CPI), used by the Bank of England to target inflation of two per cent, fell just 0.1 percentage points to three per cent.
Charles Davis, economist at the Centre for Economics and Business Research, says: ‘It is highly likely that we will see a spell of deflation this year. Our most recent forecast has CPI inflation turning negative in early summer as the year-on-year effects of much lower commodity prices and the opening of spare capacity take effect.
Davis adds that to avoid a situation of deflation ‘quantitative easing’ – or printing more money – may be a necessary measure.
According to the Office for National Statistics, the largest downward pressure on CPI came from falling transport costs and fuel costs, whereas the biggest contributor to the drop in RPI was from housing costs – particularly mortgage interest payments and property depreciation.
Davis adds that the series of interest rate cuts by the Bank of England from five per cent in September to one per cent this month also helped push retail inflation closer to zero.
However, David Kern, chief economist at the British Chambers of Commerce, says: ‘It is critical that these figures do not deter the Bank of England and MPC from pursuing forceful policies aimed at curbing the seriousness of the recession.’
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