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Inflation goes down to 3 per cent but it's not good news for Britain
Hugo Duncan17 Feb 2009
Britain was today braced for a dangerous bout of deflation after living costs barely increased last month.
Official figures show the retail prices index rate of inflation fell from 0.9 per cent in December to 0.1 per cent in January.
It was dragged down by cheaper mortgage repayments, falling energy prices and steep discounts on the high street.
The fall stoked fears that Britain is heading for a period of deflation as the recession worsens.
The Government's preferred measure of inflation, the consumer prices index, which strips out housing costs, also fell from 3.1 per cent to three per cent having peaked at 5.2 per cent in September.
Experts warned that deflation could be disastrous for the economy. A long period of price falls would see consumers put off spending in the hope of buying goods more cheaply in future, leading to crumbling profits and soaring unemployment.
Philip Shaw, chief economist at banking group Investec, said: "We still think it likely that inflation will drop into negative territory for a while this year."
A sustained period of deflation crippled the Japanese economy in the Nineties but has not been seen in this country since the Second World War.
Since October, the Bank of England has cut interest rates from five per cent to one per cent - a record 315-year low - as it battles to stop inflation falling too far. It is now considering "quantitative easing", a modern form of printing money, to boost spending, curtail the recession, and prevent deflation.
The Government has set a target of two per cent inflation. This has not been undershot since September 2007 when inflation dipped to a still safe level of 1.8 per cent.
Inflation peaked above five per cent last year as rising food and energy costs sent prices up for British consumers. However, the oil price has since fallen from $147 (£104) a barrel to below $40 a barrel, leading to cheaper petrol prices and falling household energy bills.
The Government's decision to cut VAT from 17.5 per cent to 15 per cent has also taken the sting out of inflation by lowering prices on the high street.
The prospect of deflation is particularly worrying given that the Bank of England warned last week that the UK economy would contract by up to six per cent by the middle of this year and continue to decline into 2011.
Reader views (9)
Lets see tax go down, council tax, permanent VAT reduction, taxes on fuel, tax on savings, tax on pensions then we'll have deflation. I can't live under or eat a plasma TV.
- Steve Byrne, christchurch UK, 18/02/2009 16:56
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Lets be honest. Nobody knows whether deflation will be good or bad since the art of financial forecasting is well and truely dead.
- Martyn Nicholls, Kavala, Greece, 18/02/2009 06:38
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The crucial factor is the Devaluing Pound. If this carries on Inflation will be back with a vengence!
- M Wood, somerset uk, 17/02/2009 18:40
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Deflation is bad ?
Worse than rip-off Britain with excessively overpriced goods, services, homes and rents ?
As a saver with no mortgage, I would welcome lower prices, especially fuel (rising) food( rising) Rail fares (rising)----need I go on ?
The only thing that's fallen is my income - no job, no benefits, no income from savings.
Deflation ? I don't believe it !
- Cap, London, 17/02/2009 17:39
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It is actually very good news for Britain, and the rise in house prices signals the welcomeshoots of recovery in our economy
- Keith Price, Luton, England, 17/02/2009 14:22
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What falling energy prices! What falling petrol prices, petrol has again been rising in this area, it has risen about 5 - 6p per litre more.
- Sonny, Colchester, Essex, 17/02/2009 14:07
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In the short term, UK needs a high jab of inflation of 25%. This will eventually push the house prices up. The banks will not be in the red. Printing money is one answer.
- Prashan Fernando, Colombo, Sri Lanka, 17/02/2009 13:44
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Falling home energy prices? - You have to laugh.
My gas bill is almost double lasts year's corresponding one. Thanks to higher charges, staying at home more and colder winter. I do not think I am the only one in this position. Is it beyond the capability of the BOE statisticians to actually see what is happening in the real world. No wonder we are in a mess.
- Harry H, London UK, 17/02/2009 13:04
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The real problem with these statistics is that the inflation (or deflation) rate is vastly different for different products;
Food, for example has risen in price over the last year, and the supermarkets have been taking advantage of the situation by elevating the prices of their "basics" brands 100%, whilst cutting the more expensive items.
Immoral you may think, but its just business - the more you buy (and we all NEED food), the more they will get away with charging.
Next consider cars, well the small fuel-efficient cars have retained their values for the same reason, and gas-guzzlers are being discounted `cause people either already own fairly new ones, or have seen the light!
Excessities like plasma TV’s, leather sofas, exotic kitchens etc, have been way overproduced and the market is flooded (as with cars) so these were coming down in price anyway - and you can only fill your house with so many TV`S and sofas!
That leads us to house prices - we all new they were way overvalued, but like greedy children in a sweet shop overindulged and are now feeling sick - but the deflation of houses has some way to go, they are the single biggest purchase one will undertake, so most is to gain for the new buyer as they wait for prices to fall further.
Each set of commodities has it’s own unique set of inflationary pressures.
We should be feeling most sorry for those in rented accommodation doing low paid or menial jobs, and no chance of riding the benefits gravy train.
- Darius Midwinter, London UK, 17/02/2009 11:12
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