No deflation in store for Britain

April 13, 2015

Coin.jpgWill Britain follow the euro zone into deflation? Unlikely, say a majority of the economists who participated in a Reuters poll.

Only 10 of the 46 quizzed in the past week expect prices to have fallen last month with the median suggesting the Office for National Statistics will say inflation was flat when they publish the data on Tuesday.

Dominic Bryant, head of UK economics at BNP Paribas said:
“I don’t think there will be deflation. The bigger picture is it is going to be close to zero for another two or three months. It is low inflation now – you might get a negative print, you might not, but it is not deflation.”

Oil prices tumbled over 60 percent between June and January and have only recovered some of those losses since then.

That has sent inflation tumbling across the globe – it has been negative in the euro zone for four months. Japan was stuck in deflation for years.

But even the few who do expect prices to have fallen say it won’t last long.

“It is likely this will be a short-lived bout of deflation and the UK will returning to inflation later this year,” said Alicia Higson, senior economist at the Centre for Economics and Business Research.

And even if it does turn negative for a short time it won’t matter:

“UK consumers are highly unlikely to hold back on making purchases due to the possibility of future falling prices. Rather consumers seem to be taking advantage of the boost to their purchasing power coming from lower prices,” said Howard Archer, chief UK and European economist at IHS Global Insight.

With inflation so far below the Bank of England’s 2 percent target forecasts for the first move in interest rates since they were slashed to rock bottom at the height of the financial crisis have been steadily pushed back in Reuters polls.

Once expected to be the first major central bank to begin tightening policy it now won’t move Bank Rate from its record low of 0.5 percent until early next year – and even then only by 25 basis points.

(Additional reporting by Deepti Govind)


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