Prospects of an annual dip in overall shop prices comes after last year’s halving of the oil price, a decline in raw materials costs and a drop in the cost of food

This article is more than 5 years old

This article is more than 5 years old

We have not been here since 1960: economists expect official figures on Tuesday to show annual inflation on the standard CPI measure dipping below zero for the first time in more than 50 years, pushed lower by nearly 12 months of low oil prices and ferocious supermarket price wars.



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The CPI index dates back only to 1997, but the ONS has produced comparable records going back to 1989 and estimated when the index hit zero in February that it was at its lowest since 1960.

A halt in inflation has helped boost household budgets but the return of deflation is expected to be only momentary. Inflation is tipped to reappear after April with prices rising every month until Christmas and beyond, eventually limiting real income growth and potentially hurting living standards.

The prospect of an annual dip in overall shop prices comes after last year’s halving of the oil price, a steep decline in raw materials costs, a drop in the cost of food and an early Easter holiday.

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The consensus among City banks is for inflation to remain at zero, but Samuel Tombs, UK economist at Capital Economics said the arrival of Easter a couple of weeks earlier than last year meant the bumper shopping weekend would not be captured in the monthly figures from the Office for National Statistics, giving an even lower reading for prices and pushing the annual inflation rate below zero.

Bank of England governor Mark Carney warned that inflation could turn negative before an expected pick up towards the end of the year as the effect of oil and food price falls fades. He said he expected the inflation rate to hit its 2% target in a couple of years.

Fifty years ago the retail prices index plummeted in response to commodity price falls, giving brief respite to British workers familiar with inflationary pressures that were largely absent from the continent and the US. Later in the 1960s, after several years of full employment, inflation became entrenched. In the 1970s it reached 25% before falling back during a period of austerity and was only tamed in the 1980s.

Currently inflationary pressures are once again largely absent across the world, with both the US and eurozone reporting zero inflation rates.

Tombs said the figure for April would be the best chance of a negative figure for UK inflation and was likely to mark the low point.



“The ONS figures this year will not capture Easter spending in the way they did last year. It’s a timing effect that means April is the best chance for a negative figure.

“But there won’t be a sudden rise in inflation. It will rise steadily for the rest of the year and into 2016.”

Tombs expects wages to continue rising this year, maintaining the differential with inflation and protecting real wage growth. He said he expected wage growth to plateau at around 3% in 2016, severely limiting real-terms rises in living standards if price inflation has reached 2%.

But several surveys have shown that Britain’s workers expect employers to block big pay rises. The most recent household survey by financial data provider Markit found that households on average expected no more than a 1% pay rise this year.

If this forecast is borne out, the rise in household incomes would go into reverse once inflation tops 1%, and some economists expect that threshold to be reached this year.

Answering questions about the Bank’s quarterly Inflation Report last week, Carney stressed that a temporary period of falling prices should not be mistaken for a damaging spiral of “deflation”.

He said “persistent headwinds” continued to hold back the British economy in the wake of the financial crisis, including weak global demand, the austerity squeeze on government spending and private firms cutting back their debts.



He reiterated the view of the rate-setting monetary policy committee (MPC) that inflation was likely to remain subdued and this would mean a more gradual pace of rate rises than in the past, as well as rates remaining “below historical levels for some time to come”.



Rates would rise to just 1.4% by the middle of 2018 according to market expectations, which the Bank said were in line with it meeting its 2% inflation target.



Addressing concerns that rising inflation would eat into real wages, Carney said: “Wages have grown by around 2% in the past year – less than half the average rate before the global financial crisis – and the key risk is that these subdued growth rates continue.”



Guy Foster, head of research at stockbroker Brewin Dolphin said flat or negative inflation would be largely ignored by consumers already seeing higher petrol prices at the pumps.

“Consumers are noticing that petrol, whilst still cheaper than a year ago, is not as cheap as it was in January,” said.

He warned that the feelgood factor of the last six months could wane as consumers feel the pinch from higher weekly costs

Average shop prices on the other hand are still falling. In March they slumped 3.6% on a year earlier, the largest annual fall since records began in 1997.

The effect has been marked in food prices with an intense supermarket price war eating into the profits of the major chains.

Further pressure on wages and rising petrol prices could force the supermarkets to maintain price cuts or reduce the burden on family budgets further.