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Zero inflation, interest rates and the consumer spending outlook – analysis

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25/03/2015
As inflation in the UK hit zero for the first time on record, industry experts share their views on what this means for the UK economy and investors.

Figures released by the Office for National Statistics (ONS) yesterday revealed a 12-month CPI inflation rate of 0.0 per cent, down from 0.3 per cent in January and below economists’ expectations of 0.1 per cent. Below, commentators, economists and analysts assess whether the figure represents good news, bad news, or a little of both.

Ben Brettell, senior economist, Hargreaves Lansdown:

“It looks likely the rate will drop below zero at some point in the coming months, and hover around zero for most of the year.

Although the Bank of England’s Monetary Policy Committee is currently voting unanimously to leave interest rates on hold, rhetoric from key figures at the Bank suggests opinion about the risks faced by the UK economy is becoming divided.

I believe a cut in interest rates looks most unlikely, but with inflation at zero and deflation looming it is almost impossible to see them rising either. It therefore appears interest rates will be stuck at 0.5 per cent for some time yet – I don’t see them rising until mid-2016 at the very earliest.”

Charlotte Morrish, pan-European equities, Schroders’ business cycle team:

If end demand remains positive, then falling prices should not feed through into wage negotiations and the current low rate of inflation is, therefore, likely to be temporary.

In the short-term this means that the UK’s interest rate trajectory is more likely to be driven by labour market data than movements in the headline inflation rate. Our expectations for continued growth in the UK economy and a (long-awaited) corresponding pick up in wage growth are unchanged.

BNP Paribas analysts:

The big test of whether the outlook for inflation is softer than we assume will come in H2 2015. At that point, the impact of the exchange rate should begin to fade given the pace of appreciation since mid-2014 has, on average, been slower.

If the pace of decline in core goods prices does not begin to moderate from mid-year, it would suggest inflation pressures from abroad are more muted than we currently assume. It would also imply that policy has to be kept looser for longer, unless there was some offsetting upside surprise from domestic prices.

Vince Smith Hughes, retirement expert at Prudential:

“The new inflation low of 0 per cent is good news for most households but particularly good news for pensioners, who typically spend more of their income on food and energy meaning often see proportionately higher rates of inflation than people of working age.

“The State Pension will increase by 2.5 per cent in April, meaning many less well-off pensioners will be seeing significant real-term increases to their incomes

Scott Jamieson, head of multi-asset investing at Kames Capital:

“According to the Office for National Statistics, the cost of living in the UK today is exactly the same as it was one year ago; that is if you don’t drive, eat, smoke or have the odd tipple. If you are not that person then prices are 1.2 per cent higher than they were in February 2014.

“However, food prices are falling at more than 3 per cent per annum – the sharpest rate of decline since records were first kept in 1997. Indeed if you look at the ONS website the phrase ‘never lower’ appears three times.

“Very low inflation has ensured that the spectre of higher UK base rates has gone for the foreseeable future; the money markets sense that there will be no change in rates over the next twelve months. Predictably sterling has softened by around 1 per cent on the data but the impact should prove short-lived. Market attention is on Greece, the euro and the US Federal Reserve, and zero inflation and zero interest will be a judgement for tomorrow.”

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