In December of 2014 the UK saw inflation drop to a record breaking low of just 0.5 percent. This news has delighted British consumers, but could also hint at a more worrying prospect – a global deflation.
This was not totally unexpected. Analysts had predicted a fall of 0.7 percent at the start of December 2014, largely due to falling oil price and the pricing war currently waging between Britain’s supermarkets. The ONS said: “The fall came from the December 2013 gas and electricity price rises falling out of the calculation and the continuing drop in motor fuel prices.”
The CPI (Consumer Price Index) now stands one and a half percent out of line with the Bank of England’s two percent target. Governor of the Bank of England, Mark Carney, is now tasked with explaining the reasons for this to Chancellor George Osbourne. This will be the first time that Mr Carney has had to take such action since becoming governor in July of 2013.
New rules brought into effect in 2013 means that the letter does not have to be published until mid February, although it must also be accompanied by the minutes from the latest meeting of the Monetary Policy Committee. In the past such letters were required on the very same day as the inflation release.
Jeremy Cook, chief economist at currency firm World First, said that the joint impact of falling fuel and food costs “are hurting the inflation outlook in the UK … [while] this is not exactly bad news for the consumer or the economy as a whole”.
The price of oil has been pushed lower as a result of an increase in the global supply, thanks in part to the shale boom in the United States in recent times. Demand for oil has also slowed thanks to a weakened economies worldwide, particularly in the Euro-zone and China.
Economist still fear that inflation in the G7 countries will fall to levels not seen since the Great Depression of 1932. Even a seemingly small dip in inflation can cause significant economic repercussions. In the UK, inflation could fall lower still. Paul Hollingsworth, UK economist at Capital Economics, said that: “The further 20pc or so fall in oil prices since December’s average level looks set to push CPI inflation to a record low of around 0.2pc over the next couple of months.”