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Price of food falls as recession starts to bite
Jonathan Prynn, Consumer Affairs Editor18.11.08
A DRAMATIC fall in the rate of inflation today fuelled fears of a prolonged recession.
The Consumer Prices Index dropped last month much more than expected after some prices, including those for staple foods and fuel, fell as the economy went into reverse.
Economists said inflation would plummet to zero next year, ushering in the first period of deflation for 48 years.
In a time of deflation consumers stop spending as they wait for better deals - this in turn leads to less economic activity resulting in company failures, rising unemployment and falling wages.
David Kern, chief economist at the British Chambers of Commerce, said: "Deflation would have appalling consequences for business and the economy."
In the City, fears that the recession will be much deeper and longer than in the Nineties sent the FTSE-100 Index down 65.2 at 4066.96.
One City economist said: "The economy is going down rapidly and company bosses have no choice but to cut, cut, cut."
Food prices are starting to tumble, with staples such as meat, butter and potatoes dropping last month.
The core measure of inflation, the Consumer Prices Index, fell much more than expected, from 5.2 per cent to 4.5per cent.
It was the biggest monthly fall in the rate of inflation since April 1992 and has led to more City economists forecasting a period of falling prices - deflation - by the end of next year.
It also increases the chance of the Bank of England cutting its base rate by at least 0.5 per cent next month. Some forecasters are even pencilling in a full percentage point cut to two per cent, from the current three per cent, equalling the lowest on record.
The collapse in the oil price, which peaked at $147 a barrel in July, is the biggest factor in the fall in the CPI rate. Food prices are also starting to come down because of bumper rice and wheat harvests around the world and lower costs of production due to cheaper oil. Supermarkets have also been very aggressive in cutting prices to keep shoppers coming through the door.
Although food overall is still 10.1 per cent more expensive than last year, the figures show that many food prices were virtually unchanged last month. But many kitchen essentials, ranging from bacon to sugar, fell in price.
Economists said the inflation rate will "drop like a stone" in the next year to well below the Government's target of two per cent. This will pave the way for interest rates falling to as low as one per cent or even zero within a year.
The figures point to a bargain Christmas with stores slashing prices and using promotions on an unprecedented scale.
Jonathan Loynes, chief European economist at forecasters Capital Economics, said: "October's sharp fall in CPI is the first step along a road that is likely to see inflation turn negative next year for the first time in almost half a century. Not only that but deflation is about to be reborn."
Some economists are worried that deflation will usher in a more prolonged slump because consumers will stop spending if they think they can buy goods for less in the future.
David Kern, chief economist at the British Chambers of Commerce, said: "The declines in inflation were much sharper than the markets were expecting. We predict further sharp falls in CPI inflation towards one per cent in the final months of 2009. Deflation would have appalling consequences for British business and for the economy as a whole so it is imperative that the Government and the Bank of England take forceful action."
Chancellor Alistair Darling is widely expected to inject billions of pounds into the economy through tax cuts in next Monday's pre-Budget report.
However, that will not stop a full-blown recession - two consecutive quarters of negative economic growth - being confirmed in January.
Reader views (10)
Bibi Nu Labor. It is time to go Crash Gordon!!
- Georgie, Islington, London
A few months ago, everyone was talking about the high cost of food being caused by world food shortages. If this was the case, how come food prices are now falling? Have people stopped eating and now there is a world food glut? Seems to me like the shortage scares were just more excuses to justify the profiteering of the large food retailers, who I expect will only put more suppliers out of business by cutting their rates and extending their payment dates.
- Paul, Twickenham, UK
Prices are falling? Or are consumers just more careful? I know my shopping habits have changed over the past 6 months or so - happily venturing into the 'Value' brands whereas I was rejecting them in the past. That smug stare my wife gives me when I now pick up a 'value' brand - when in the past she's seen me picking these out of the trolley with a firm 'NO!'
- Sanjay, Hounslow, UK
Hey! Well done to the British press for sensationalising the situation and scaring the heck out of everyone. So yes deflation will happen. The recession will last 20 years. UK will become the poorest country in the developed world. Unemployment will peak at 60%. And infant mortality rates will increase but 7000%. Let's go all the way and talk ourselves into the worst downturn ever.
- Dellboy, London
Well done Gordon. The medicine is clearly working already. Too bad the opposition can't back you to the hilt
- Keith Price, Luton, England
I do not know where food prices are falling...tinned tuna is still very expensive in relation tosix months go,bread,cheese toiletries..please tell us where this cheap food is as none of the supermarkets have it and even lidls tuna fish has jumped in price!!
- Jean, LONDON England
Shop around,every supermarket has its good and poor value items.It takes time though.
When I was a kid,my mother used to 'surf' from shop to shop to get the best value.Nowadays,I have to do it by car,from supermarket to supermarket.No progress there,it takes time,petrol and carbon points.Ho hum
- E.Smith, London UK
At a time like this the last thing we need is a mad Scotsman in charge of the nation's finances. All he cares about is getting re-elected in 2010. His spend, spend, policies are crazy. After 2010 the country will go to the bottom like the Titanic.
- Len Moss, burgess hill
Prices falling, rents falling etc, who really gets hurt in a recession?
- Kev, London
You just can't help yourselves can you? 12 months of screamingly hysterical headlines about inflation killing us all, followed by a 0.7% fall to a level still more than double target rate and almost wholly due to oil coming down to a more sensible level which now provokes screamingly hysterical headlines about deflation killing us all etc etc.
- Tim, London
