What does the The big 0 mean for the UK economy?

24th March 2015 By: Ranko Berich

UK CPI – 24/03/2015

For the very first time, Consumer Price Index inflation has ground to a complete halt in year-on-year terms.

George Osbourne and David Cameron have been quick to write off the ‘noflation’ as purely a symptom of lower fuel prices, pointing to the positive aspects of low inflation for British households. While this argument certainly has some weight, today’s data also showed year-on-year deflation in five categories, including food, as well as slower price increases across many others. This suggests that the UK could well be succumbing to the wave of low inflation that has swept the eurozone, and a sustained period of deflation remains a key risk.

Above all, today’s results vindicate the Bank of England’s cautious approach to rate hikes. Today’s fall in CPI was very well signalled by the BoE at the time of their last inflation report, reflected in the lack of impact in the markets.

Looking ahead if this shock is indeed temporary, and inflation stabilises, then the Bank and the Government can pat themselves on the back while consumers enjoy a real wage boost. However, if this is the beginning of a permanent slump in prices then both fiscal and monetary policy in the UK will have to take a long, hard look in the mirror.