UK suffers first signs of deflation - Retail prices fall for first time since 1960

UK suffers first signs of deflation - Retail prices fall for first time since 1960
By Daniel Pimlott
Copyright The Financial Times Limited 2009
Published: April 21 2009 10:29 | Last updated: April 21 2009 10:29
http://www.ft.com/cms/s/0/92698d4c-2e53-11de-b7d3-00144feabdc0.html


The retail price index fell for the first time in nearly 50 years in March, in a sign of increasing deflationary pressures hitting the economy.

The RPI, a long standing measure of inflation, slowed to minus 0.4 per cent during the month, after remaining flat during February, the Office of National Statistics reported on Tuesday.

The fall in the RPI was the first since 1960, and is a harbinger of falling demand in the UK economy as unemployment mounts and access to credit is reduced.

“All told, today’s data confirm that inflation is on a downward trend in the UK. With deflation now having arrived, the overwhelming priority is to ensure that this period of falling prices is short-lived,” said Colin Ellis, economist at Daiwa Securities SMBC.

The RPI has fallen sharply since reaching a peak of 5 per cent last September, amid falls in house prices as well as huge cuts in interest rates by the Bank of England, which has driven down mortgage payments on many home loans. Falling gas and heating fuel prices have added to the downward pressure on prices.

Overall housing costs are down by 10.3 per cent in the last year. Excluding mortgage interest payments, the retail price index rose by 2.2 per cent.

Many economists expect RPI to remain negative for an extended period. However, economists and the Bank of England are more concerned about the slowing rate of the consumer price index – which excludes some variables including mortgage interest payments.

The CPI is showing more resilience than many had expected and in March was at 2.9 per cent, down from 3.2 per cent in February but still well above the Bank’s 2 per cent target. Falling energy bills and food prices in the month helped pull inflation down.

Core inflation, excluding volatile elements such as energy costs, actually edged up from 1.6 per cent to 1.7 per cent against expectations of a 1.5 per cent rise. Economists believe that the sharp fall in the value of sterling is helping to keep prices at a higher level.

But CPI inflation is now at its lowest level since last March, and many economists expect it to turn negative later this year – meaning the British economy will experience a period of deflation.

The Bank has begun its unprecedented policy of quantitative easing – creating money to buy up gilts and corporate debt – in order to avoid inflation remaining too low for an extended period or even slipping into a deflationary spiral.

“The inflation data do little to dispel expectations that interest rates are set to stay at 0.50 per cent for an extended period and that the Bank of England could eventually extend its quantitative easing programme,” said Howard Archer, economist at IHS Global Insight. “The danger of an extended, deep recession still outweighs inflation risks.”