Britain falls back into deflation as tumbling fuel prices take effect

Britain has tipped back into deflationary territory as consumer prices were pushed in to negative territory for the first time since April, reports The Telegraph.

Inflation came in at -0.1 per cent in September, matching the lowest level seen in the UK economy since 1960. Economists had expected prices to remain unchanged at 0pc.

Aggressive clothing discounts and falling petrol prices, were to blame for September’s numbers, said the Office for National Statistics.

Clothing and footwear prices rose by 2.8 per cent between August and September this year compared with a rise of 4.0 per cent during the same period last year.

The introduction of a price cut from British Gas also took effect in last month’s figures. Gas prices fell by 2.1 per cent compared with no change between the same two months a year ago, said the ONS.

Food prices – which have been falling as result of the supermarket price wars – rose last month by 0.02pc.

But in more encouraging signs for the economy, core inflation – which strips out volatile elements such as energy and food – remained unchanged from August at 1.1 per cent.

Economists now expect inflation to start bouncing back at the end of the year, as the commodity price fall stabilises.

Britain has been skirting with “noflation” since the start of the year, with CPI hitting 0pc four times over the last nine months. Average inflation in 2015 is set to register at 0pc, one of the lowest years of consumer price rises in the post-war era, according to analysts at Barclays.

Chancellor George Osborne said Britain was not entering a period of “damaging deflation” and that falling prices would be a boon to people’s pay packets.

“We remain vigilant and our system is designed to deal with such risks,” he tweeted.

Real wages have been the biggest beneficiary of subdued inflation. Pay data released on Wednesday is expected to show that real wage growth is at its highest since the financial crisis hit 2008.

“A dip into deflation is no great surprise, nor is it a great calamity”, said Jeremy Cook, economist at World First.

“This dip is likely to be one of the last few around the zero bound given the declines in crude started last November”.

However, a sustained period of mild “disinflation” is likely to deter the Bank of England’s rate-setters from finally starting the gun on an interest rate rise, said Vicky Redwood, at Capital Economics.

“Inflation will take a long time to get back to its target; as the MPC conceded in its latest minutes, it will take until the spring even to get back to 1 per cent”, she said.

Rob Harbron at the Centre for Economics and Business research said: “Price pressures will begin to creep in next year – not least from the introduction of the National Living Wage – and the time to start tightening monetary policy grows close.”