That’s the first time since Sept 2007 that the Consumer Prices Index – the Government’s chosen measure of inflation – has been below the official 2% target. Bank of England Governor Mervyn King can put away his quill pen at last – for the first time in ages he won’t have to write a letter to the Chancellor explaining why.
According to the ONS, the reason for the fall – down from 2.2% in May – is reduced food prices. Milk, meat and fruit in particular. And also, rather more bizarrely, lower furniture prices. Sofa, so good then.
The fall has been generally well received, as it suggests that the potential upward pressure from quantitative easing has not materialised – or not yet at any rate. The strengthening pound has also helped reduce the cost of imports, as well as serve as an indicator that the UK recession, while severe, is no worse than that of the big Eurozone economies and may even be better than some.
There are those however who now see the main risk over the next year or so coming from deflation, which although it sounds fairly benign (everything getting cheaper, what’s wrong with that?) can actually be an insidious and very hard to tackle economic problem.
The doom mongers' hand is strengthened by the fact that the other main measure of inflation, the Retail Price Index (which includes housing and mortgage costs) has been in negative territory for some time, and in June hit an all time low of -1.6%. That’s the lowest figure since the ONS began recording the RPI in 1948.
There are also mixed messages coming out of the housing market (no change there then), with some suggestions that a lack of homes for sale is pushing up prices slightly. But it’s hard to see any major revival in house prices while credit remains tight and fears over job security remain.
But the economists’ consensus – for what that is worth – seems to be cautiously positive. Inflation will continue to fall over the coming year, they say, but is unlikely to enter negative territory. So that’s alright then.
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