It’s official: Britain is the nation of deflation

THE cost of living is falling for the first time since 1960, official figures confirmed today.

A 0.4 per cent drop in the Retail Price Index last month ushered in the bout of deflation, Britain's first in almost half a century.

Economists said they did not expect the drop to be a one-off blip, predicting further falls in prices over the summer as lower energy and food bills feed through to the inflation figures.

Rob Pike, from the Office for National Statistics, said: "Clearly on the horizon there are downward pressures."

The negative RPI, caused largely by lower mortgage costs, means millions of workers face the prospect of pay freezes because wage settlements are usually linked to the RPI.

Unions today warned employers not to use the RPI fall to cut pay. TUC general secretary Brendan Barber said: "Although in some workplaces unions have agreed to put pay increases on hold or take cuts, this shouldn't be the signal for employers across the country to seek wage freezes or cuts in pay."

The official rate of inflation, the Consumer Prices Index, which is the Bank of England's official target rate, fell from 3.2 per cent to 2.9 per cent, slightly higher than expected.

Financial experts said lower prices were a rare piece of good news for savers. Kevin Mountford, head of banking at moneysupermarket.com said: "The level of savings has been too low for too long in the UK. However, deflation might be the trigger savers need to get them back in the habit because their money will be worth more.

"The Government will also be hoping this increased purchasing power will encourage consumers to spend in an effort to kick-start the economy."

Pensioners are likely to be worse off because they do not benefit from lower property costs. Few have mortgages and most spend more on items that are still rising in price such as food. Economists also warned that deflation could make consumers more reluctant to spend.

David Kern, chief economist at the British Chambers of Commerce, said: "The RPI is in negative territory and fell by more than expected. Deflationary pressures could make the recession worse in the short-term, despite quantitative easing and the huge budget deficit posing inflationary pressures.

"The Chancellor must address these conflicting risks in his Budget. He must support business and administer targeted fiscal stimulus. But he also has to present a credible medium-term plan for restoring public finances to health."