Inflation tumbles closer to zero

Although CPI fell less than expected last month, retail price inflation has slumped to just 0.1%...

Last Updated: 31 Aug 2010

Official figures released this morning show that the headline rate of consumer price inflation fell to 3% in January, just 0.1% lower than December’s figure – a smaller drop than most analysts were expecting. However, on the alternative Retail Prices Index measure – thought by many to be a more accurate reflection because it factors in housing and mortgage costs – inflation tumbled to just 0.1%, down from 0.9%. So we’re not in negative territory just yet, but it’s probably only a matter of time…

The small drop in the consumer rate comes as a bit of a surprise, since retailers spent most of January slashing prices aggressively in a bid to entice cash-strapped punters into their shops. Given the fuel and commodity costs are also heading in a downward direction, the consensus prediction was for CPI to drop to about 2.7%, or possibly even lower. Some economists were also predicting that the RPI figure would fall into negative territory for the first time in 50 years – that hasn’t quite happened either, but at 0.1%, it’s almost into the worrying territory of deflation.

But even if the drop wasn’t as big as expected, inflation looks to be going in one direction – down. In its latest inflation report, the Bank of England suggested that even the CPI measure could drop to about 0.5% this year (some think it might even fall below zero) and remain well below its 2% target until 2012 – this could be disastrous for the economy, if it stops people spending. That’s why the Bank is likely to cut interest rates even lower, and will eventually resort to increasing the money supply via quantitative easing.

One possible mitigating factor, according to the Bank, is the weakness of the pound. The collapsing value of sterling is making imports more expensive, which should ultimately push up shop prices. And some parts of the consumer economy seem to be proving pretty resilient: for instance, Capgemini reports that internet shoppers splashed out £4bn in January, a 19% increase on last year. Spending on clothes, shoes and accessories was up 32% - after all, how can shoppers be expected to survive the recession without a new handbag?

Sadly today’s inflation news wasn’t delivered by an apparently drunk Finance Minister, as happened in Japan at the weekend. Shoichi Nakagawa blamed the whole thing on some particularly potent cold medicine (the sort that comes in a dimpled bottle, perhaps?) and has since resigned, but at least it enlivened what would otherwise have been more dreary economic news. Perhaps Alistair Darling should give it a go on Budget Day?

In today's bulletin:
Inflation tumbles closer to zero
Darling provides a home for stricken bankers
Domino's Pizza targets working lunches after latest sales boost
Why a bad interview could be costly
Do It Right: Top tips for advertising in a recession

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