Deflation worsens as retail prices drop at record rate

The Retail Prices Index falls even further into negative territory, as fuel and food gets cheaper.

by
Last Updated: 06 Nov 2012

Prices continue to slide in the UK: the Retail Prices Index fell to -1.2% in April, down from -0.4% in March. That’s the lowest level in its 60-year history, and according to the Office of National Statistics, it's largely due to lower energy bills and cheaper food. The Consumer Prices Index (which strips out housing costs) also fell at a faster-than-expected rate, sliding from 2.9% to 2.3%. It's now almost in line with the Bank of England's official target of 2% - but we suspect Governor Mervyn King and co will be too busy worrying about deflation to celebrate...

The annual RPI figure is perhaps the most eye-catching: its collapse into negative territory last month (based on a comparison with this time last year) was the first in 50 years, and April's fall has taken it below the previous record low of -0.8% (in June 1959). Whereas electricity and gas bills were shooting up this time last year as the oil price soared, they're now sinking; and lower mortgage payments were also a big contributing factor, with interest rates so close to zero. This measure is important for two reasons: one, many people think it's a more accurate reflection of price pressures (since it includes mortgage costs), and two, it's often used as the basis of wage negotiations. So if you're relying on the RPI for a pay rise, tough luck.

Meanwhile the CPI was also affected by many of the same downward pressures - not only energy bills, but also cheaper food (surprisingly), drink, booze and cigarettes. It's now at its lowest level for over a year, which is technically good news for the Bank since it's close to the 2% target. However, most economists don't expect CPI to stop there - even the Bank seems to think it will keep falling this year, probably below the 1% level that will require a letter of explanation to the Chancellor.

Generally speaking, inflation has held up much better than the City was originally predicting, largely because the big drop in the value of sterling has pushed up import prices, preventing serious deflation. However, the pound has been rallying a bit lately, and rising unemployment is also likely to hit spending. So the Bank is likely to have its hands full warding off deflation in the coming year: pumping new money into the economy via quantitative easing will certainly have an inflationary effect, but it'll be very wary of going too far...



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Deflation worsens as retail prices drop at record rate
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