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Inflation reaches zero

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Inflation has hit zero, its lowest level on record.

The Consumer Prices Index (CPI) grew by 0 per cent in the year to February 2015 versus annual growth of 0.3 per cent in January.

The main contributors to the drop were a large fall in the oil price and the supermarket food price war.  The price of recreational goods such as books and games also fell. These falls were not offset by significant rises anywhere else.

Jason Hollands, managing director at Tilney Bestinvest, said: “Much of this can be attributed to the dramatic slide in oil prices since last summer, which should feed through to a further drop in inflation into negative territory in March as cuts in household energy prices filter through. However oil prices, while weak, have lifted from their lowest point and therefore the period of ultra-low inflation is likely to prove a temporary phenomenon during 2015.

He believes this should push talk of interest rate hikes out into the long-grass, which should in turn support bond and equity markets. Bank of England governor Mark Carney has indicated that rates could be cut even further if deflation does take hold – although BoE chief economist Andy Haldane said the UK has an equal chance of seeing a rate cut as a rate hike this year.

Howard Archer of IHS Global Insight believes the CPI would’ve fallen even further, but the drop “was likely limited by a significantly reduced year-on-year drop in petrol prices as oil prices firmed from their January lows.”

“Consumer price inflation may well test 0.0 per cent during the next few months and it will likely remain below 1 per cent through to the end of the year,” he continued.

Deflation risks remain and pose a threat to the UK economy. Maike Currie, associate investment director, Fidelity Personal Investing, said: “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 future. With inflation now at zero, the UK is now just one shock away from deflation.

“The fall in core inflation is worrying and raises question marks over whether the UK is suffering from unhealthy deflation or welcome disinflation, which lines the pockets of consumers and boosts the economy. It is also worth noting that both food and fuel are essential items – no one is going to delay their weekly shop or avoid filling up their car’s petrol tank in case prices continue to fall. However, if other pressures start to weigh on prices, we could see the Bank of England make a U-turn on the future path of interest rates – with the possibility of rates facing a cut from their current historic low of 0.5% or at the very least keeping interest rates lower for longer.”

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