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• RPI falls to -0.4% from 0%
• CPI measure still at 2.9%
Deflation returned to Britain for the first time in nearly five decades last month as prices measured by the retail price index (RPI) were lower than the same time a year ago.
The Office for National Statistics said the RPI was 0.4% lower in March than it had been in March 2008. That was the first negative reading since March 1960, when Harold Macmillan was prime minister and John F Kennedy was running for the US presidency.
On the government's preferred consumer price index measure, which excludes housing and mortgage costs, inflation was still comfortably in positive territory, at 2.9%. CPI is much higher here than the 0.6% figure for the eurozone and economists say the falling pound has pushed up some import prices, delaying the drop in the CPI.
A short period of falling prices should help consumers because it will make their increasingly squeezed income go further. However, if prices continue falling for a long period and deflation becomes entrenched, that can have an adverse effect on the economy as consumers continually hold off making purchases in the expectation of lower prices. This in turn forces firms to cut wages and sets off a damaging spiral.
Committed to quantitative easing
Figures from the Bank of England show that a third of firms have agreed pay freezes in recent months and some have cut pay. Workers at Honda's car plant in Swindon were recently told they will have to take a 10% pay cut this year, after a similar announcement by Toyota to its workers in Derby.
Japan suffered a prolonged period of deflation in its "lost decade" of the 1990s and policy makers in Britain have thrown a huge stimulus at the British economy in the shape of tax and interest rate cuts in a bid to prevent deflation taking hold.
Colin Ellis, economist at Daiwa Securities, said: "With deflation now having arrived, the overwhelming priority is to ensure that this period of falling prices is short-lived."
Speaking to the Treasury select committee today, new Bank of England monetary policy committee member Paul Fisher said he was concerned that the Bank could miss its 2% CPI target "on the downside" as the big oil price rises of spring 2008 drop out of the figures in the coming months. Fisher stressed that the MPC remained committed to its policy of "quantitative easing", by which it is seeking to pump £75bn of new money into the economy to breathe life into it.
Fuel and vegetables
The ONS said the largest downward effect on inflation came from falling gas and heating oil bills. Food and non-alcoholic drinks also pushed inflation down with the largest effect coming from vegetables, where prices fell by more than a year ago across a range of products.
Transport costs also pushed the figure down. This was mainly because of lower air fares on European routes. There was also an effect from fuel, which is rising less this year than it was at the same time last year.
The average price of petrol rose by 0.9p a litre between February and March to 90.4p but this compares with a rise of 2.3p a litre last year.
"The inflation data do little to dispel expectations that interest rates are set to stay at 0.5% for an extended period and that the Bank of England could eventually extend its quantitative easing programme," said Howard Archer, economist at IHS Global Insight. "The danger of an extended, deep recession still outweighs inflation risks."
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