In February, the inflation rate in the United Kingdom fell to 0%. This is the lowest rate since records of inflation were first taken in 1960. Official figures demonstrate that lower prices of transportation, food, and computer goods helped to cut the rate back from January’s inflation rate of 0.3%. Although these figures are good indicators in some ways, they can also impact the interest rates set by the Monetary Policy Committee, which is considering raising the rates from their record low of 0.5%.
The Bank of England (BoE), thus far, only perceives the decline in inflation as a temporary situation. Consequently, it is not widely agreed that there is a necessity to raise interest rates to bring the inflation target back to 2%. Matt Carney, the Governor of the BoE believes that it would be “extremely foolish” to change rates or expand quantitative easing in response to the declining oil prices, unless lower inflation rates were to pose a threat to wage growth, consumer spending, or business investment.
According to Chancellor George Osbourne, “low inflation due to falling oil prices is good news for family budgets.” The decline in prices of consumer goods and lessened inflation allows their families to increase their spending power and be able to purchase more. Even core inflation, a measure that excludes volatile factors such as food, slowed to about 1.2% compared to 1.4% in January. The chief economist for the British Chambers of Commerce also stated that the combination of higher earnings and lower inflation will contribute to economic growth in the following year. However, if stagnation in prices continues longer, it will result in deflation for the country which would not be ideal.
Producer prices fell in February by about 1.8%, meaning that deflationary pressures are only continuing to build up. Although economists expect inflation to be negative in the upcoming month due to energy cost cuts, they also doubt that the United Kingdom will suffer from an extended period of deflation. Additionally, many economists expect UK consumer demand to remain constant due to signs of growth in employment and wage increases.
With plummeting oil prices around the world, other nations, such as Malta and Macau, have also been experiencing major declines in inflation. However, the United Kingdom is the only country to reach an inflation rate of zero so far. To learn about the UK’s previous annual inflation rates and other economic indicators, please visit its economy page on globalEDGE.