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Tuesday, May 19, 2015

UK Inflation Figures shows Lower Cost of Living

It is the first time Consumer Price Index (CPI) inflation has turned negative since 1960, based on comparable historic estimates, the Office for National Statistics said.
The biggest contribution to the fall came from a drop in air and sea fares.

Chart showing CPI and RPI inflation since 2005Bank of England governor Mark Carney said he expected inflation to remain very low over the next few months. 

But Mr Carney added that "over the course of the year, as we get towards the end, inflation should start to pick up towards our 2% target".

The latest inflation figures show that transport costs were nearly 0.5% lower in April than the same time a year ago, while food was 0.32% cheaper. 

Chancellor George Osborne said the inflation figure should not be mistaken for "damaging deflation".

He added that the lower cost of living - driven by last year's fall in oil prices - would be a welcome relief for family budgets, in an environment in which average wages were finally beginning to rise.

"Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them, should they arise," Mr Osborne added.
Shadow chancellor Chris Leslie said: "Any relief for households is welcome, but this month's figures reflect global trends and [that] doesn't change the reality that many are still struggling to pay the bills. 

"The government must clearly guard against the risk that business investment might be deferred. We need stronger action now to raise productivity to deliver sustainable growth and rising living standards."
The latest inflation figure means that a basket of goods and services that cost £100 in April 2014 would have cost £99.90 in April this year.

The last time CPI inflation was negative, according to estimates by the ONS, was March 1960, when prices were 0.6% lower.
The last time we saw a price fall in the UK was March 1960, before even I was born, when there was a drop (probably) of 0.6%.
So my natural impulse is to say that deflation has arrived in Britain - because there is no other word in the English language than "deflation" to describe this phenomenon.

However many of those who define themselves as "serious economists" (that's not me, by the way - I'm a hack) are desperately anxious that I and you don't use the "d" word - for two reasons.

One is that they say proper deflation is a long term term trend of declining prices, and they believe - almost certainly correctly - that these current price falls won't endure much more than a month or two.
The other is that proper deflation is pernicious: if we believed that prices were set to fall month after relentless month, we would spend less - in the hope of picking up bargains later - and our bosses would pay us less.

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