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Is the UK Heading for Deflation?

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For the first time since 1960, UK may be on the brink of deflation. Falling energy prices, coupled with an escalating supermarket price war have resulted in the inflation rate below zero in February. Bank of England governor, Mark Carney, confirmed that ‘deflation is on the cards’ and that it is “more likely than not” that Britain will enter a mild period of deflation in the first half of this year, driven by a collapse in the oil price

Even if the UK avoids March deflation, it will most probably soon enter a period of plunging prices.

Inflation has in recent months been weighed down by the tumbling oil price. The governor has described the falling oil price as “unambiguously positive” and said it was likely to boost global GDP by just under 1 % over the next three years, with a 2.5% increase of demand for UK exports.

He said the fall in inflation due to this was not generalised deflation proper.

Lower oil prices are expected to boost UK consumers as householders spend their windfall, even if they save 40p for every pound. But the governor stressed that oil was not the only factor and additional disinflationary factors included the slide in wages and prices in Europe as well as falling producer prices in China amid a glut of concrete and steel production..

Vicky Redwood, an economist at Capital Economics, agreed: “We don’t think that deflation is a bad thing in its current form. It has been driven by a drop in energy and food prices that is helpful for the economy. There is still no evidence of more fundamental deflationary pressure. We still expect inflation to be heading up again by the end of the year.”


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