The Consumer Prices Index dropped to 4.1% last month, down from 4.5% in October – a sizeable drop, but not quite the 0.6% fall (to 3.9%) that economists were predicting. We’ve spent most of the last year fretting about inflation being too high, but as the price of fuel plummets and consumer spending falls off a cliff, deflation has suddenly become the big concern. It’s a sign of the times that it now counts as good news when inflation comes in a full 2.1% above the Government’s target…
Nonetheless, we shouldn’t forget how rapid the turnaround has been. In the summer, when oil was selling at a record $150/ barrel and prices were soaring, inflation was running at more than 5% – making it difficult for the Bank of England to cut interest rates in order to ward off the imminent downturn. Fast forward a few months, and the picture is completely different: with demand tumbling all round the world, oil is now worth less than $50/ barrel, and that’s dragging down the CPI so quickly that the Bank can’t cut rates fast enough. It now thinks the risks are ‘weighted to the downside’ – in other words, it’s principally worried about deflation.
Most analysts were actually expecting an even sharper fall in CPI last month, given the constant stream of bad news we seem to be getting about the economy at the moment. But it seems that the negative effect of the fuel price cuts have been offset to some extent by a rise in the price of fruit and vegetables, making the drop slightly smaller than expected. However, the Retail Prices Index may be a more accurate reflection of what’s really going on: on this measure (which factors in housing costs), inflation plunged to 3% in November, down from 4.2% in October.
All of which probably means that the picture will continue to deteriorate in the coming months – it seems pretty likely that prices will keep falling as the recession bites, taking CPI down towards (and possibly below) the Government’s 2% target. For its part, the Bank will presumably keep cutting rates in a desperate bid to ward off deflation. Falling prices may sound like a good thing – and for the less well-off, cheaper fuel bills will certainly be a boon – but deflation would be pretty disastrous for the economy, because it would further discourage people from spending money. The Bank will be keen to avoid this, so the current base rate of 2% – already a 50-year low – is certain to come down even further in the coming months.
Today’s figure also means that Bank governor Mervyn King will have to get out his quill and pen a letter to the Chancellor, explaining why inflation is still more than 1% above the Government’s 2% target. At least he’s unlikely to be doing this for long...
In today's bulletin:
Inflation slides again as fuel prices plunge
PartyGaming boss Dikshit faces $300m US fine
Red-letter day for Royal Mail?
How Britain's Most Admired boards have changed in a decade
Laying down the law on training