Inflation falls to zero in pre-election boost for the Government

Inflation boost: Prime Minister David Cameron

Jonathan Prynn, Business Editor @JonPrynn|Consumer Business Editor

24 March 2015

The rate of inflation has dropped to zero for the first time on record in a huge pre-election boost for the Government.

The historic landmark was hailed as “the right sort of price freeze” and means that the cost of living last month was exactly the same as it had been a year before.

The tumbling prices of daily staples such as food and fuel were largely responsible for inflation falling more than expected, from 0.3 per cent to an unprecedented 0.0 per cent in February.

It puts Britain on the brink of the uncharted economic territory of deflation as prices are expected to show year-on-year falls within the next two months.

It may also delay the start of interest rate rises from the Bank of England until deep into next year and could even raise the prospect of a further cut from the current all-time low of 0.5 per cent.

In its statement, the Office for National Statistics said: “A basket of goods and services that cost £100 in February 2014 would still have cost £100 in February 2015. This is the lowest 12 month rate on record.”

UK could face 'clear and present danger', says Bank of England boss Mark Carney

City economists welcomed the “death of inflation” while David Cameron said in a tweet: “Inflation is running at 0 per cent — the lowest on record. It’s good news for family budgets and a sign our long-term plan is working.”

Liberal Democrat Chief Secretary to the Treasury, Danny Alexander, said: “Today’s zero inflation is the right sort of price freeze, with low oil prices feeding through to prices. Coming alongside good growth and record numbers of jobs.”

The unprecedented zero CPI rate means that families are slowly getting better off after years of austerity squeezes on living standards during and after the recession.

Earnings are currently rising at 1.6 per cent excluding bonuses.

Detailed figures from the ONS show that food prices have fallen by 3.4 per cent in a year with bumper harvests and intense “fight for survival” competition between the supermarkets slashing the cost of a full trolley.

The price of petrol and diesel has plummeted even faster following the collapse in the crude oil market since last summer. The cost of filling up a car has fallen by an average of 16.6 per cent in a year.

There were also falls in the cost of other goods such as laptops and computer equipment, toys, books and games.

The recent strength of the pound has also helped to keep the price of imports from Europe down. Most economists said Britain was heading for a period of “good” deflation when the falling price of staples provides a boost to family budgets rather than “bad” deflation when a prolonged general fall in prices makes consumers delay their spending in the hope of getting a better deal in future.

Vicky Redwood, chief UK economist at City forecasters Capital Economics, said: “It looks odds-on that inflation will turn negative in March, when the cut in gas prices by British Gas — the utility company with the biggest market share — will show up in the inflation figures for the first time. And inflation is then likely to remain around zero/slightly negative for the rest of the year.

“But we doubt that this will turn into more serious and ingrained deflation, given that inflation expectations seem well anchored.

"We still think that deflation in the UK will be a ‘good’ development, giving households’ incomes a welcome boost and supporting the economic recovery this year.”

Bank of England governor Mark Carney warned this month that Britain could face a “clear and present danger” if low levels of inflation fell into a “death spiral” of the sort blamed for the Great Depression of the Thirties.

Inflation falls to zero in pre-election boost for the Government

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