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UK inflation dips back to zero

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UK inflation dipped back to zero in August, down from 0.1% in July, according to the Office for National Statistics (ONS).

A smaller rise in clothing prices on the month compared with a year ago was the main contributor to the slight fall in the Consumer Prices Index (CPI).

There were also downward effects from falling motor fuel prices and sea fares.

Rising prices for soft drinks and for furniture and furnishings partially offset the fall.

Inflation has now been flat or negative for five out of the past seven months – a far cry from the Bank of England’s 2% inflation target.

“It is important to distinguish between disinflation – a slowdown in the rate of inflation; and deflation – a persistent and ongoing fall in prices,” said Maike Currie, associate investment director at Fidelity Personal Investing.

“The two are not the same thing. Both food and fuel – the main drivers of the historically low inflation numbers we are seeing – are two essential items. No-one is going to delay their weekly trip to the supermarket or stop filling up their car’s petrol tank, because they expect prices may fall next month. Deflation is dangerous because it causes companies and consumers to do the exact thing that causes more deflation – delay spending in the hope of further price falls in the future.”

Currie added: “With inflation virtually non-existent, the Bank of England is under even less pressure than the Fed to raise rates and sure enough last week’s meeting of the Monetary Policy Committee voted 8-1 against a hike on this side of the pond – pushing UK rate rise expectations as far out as August 2016.

David Lamb, head of dealing at the foreign exchange specialists FEXCO, said: “To be fair, there is little in this CPI figure to surprise the Bank. Falling oil prices have once again dragged inflation back to zero; but this is likely to be a short-term effect, and the Bank’s longer-term projections still stand. Gentle inflationary pressure should necessitate a rate rise only by the middle of next year.”

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