Retail Price Index hits record low
May 20 2009 by Iain Laing, The Journal
EASING pressure on households from lower utility bills and food costs caused a further fall in inflation last month.
The wider Retail Prices Index measure, which also includes mortgage interest costs and house prices, fell to a record minus 1.2% during the month – the lowest since ONS records began in 1948.
Experts predict the current deflation seen in the RPI will be temporary – peaking in September before moving back to positive territory as 2008’s steep rate cuts are not matched this year, creating inflationary pressure.
This should help avert a wider deflationary spiral, which would cripple a recovery as the economy wallows in a vicious circle of falling prices, wages and investment.
The Consumer Prices Index (CPI) – the inflation benchmark watched by the Bank of England – slid to 2.3% from 2.9% in April, the Office for National Statistics (ONS) said. CPI, which does not include mortgage interest payments or house prices, is now falling steadily back towards the Bank’s 2% inflation target but is set to slide below it later this year.
April’s fall comes after cuts in gas and electricity bills from energy suppliers compared with rises a year ago, water bills which rose at a slower rate than 12 months earlier, as well as lower rental costs.
Food prices are now rising at their slowest rate since May last year, with falling meat, potato and cereal costs compared to rises 12 months earlier. Bread and pork also rose at a lower rate than last year.
Despite upward pressure from factors such as higher alcohol and cigarette prices and a sharper rise in average petrol costs than last year, inflation is set to dwindle further as the UK wrestles with recession.
Charles Davis, an economist with the Centre for Economics and Business Research, said: “Today’s figures were marginally lower than expectations but fit with a picture of inflationary pressures rapidly dissipating as economic activity runs below potential.”
Bank of England forecasts published last week predict CPI will run below target for the next two years despite interest rates at a record low of 0.5% and the £125bn in newly-created money being pumped in to help stimulate the economy.
Jonathan Loynes, of Capital Economics, added: “The numbers should act as something of a reminder to markets and policymakers alike that excessively low inflation, and perhaps even deflation, remains a bigger risk over the next year or two than a sharp upturn in inflation.”
The RPI’s fall reflects lower mortgage interest payments and house prices as well as the same factors which brought down the CPI. April’s minus 1.2% exceeds the previous low of minus 0.8% in 1959 and follows the Bank of England’s interest rate cut to 0.5% in March, bringing reduced mortgage payments for many households.
