UK’s inflation rate falls below zero for first time in 50 years

Britain’s inflation rate unexpectedly fell below zero for the first time in more than half a century, as the drop in food and energy prices depressed the cost of living.

Consumer prices declined 0.1 per cent in April from a year earlier, the Office for National Statistics said in London on Tuesday.

Economists had forecast the rate to be zero, according to the median of 35 estimates in a Bloomberg News survey. Core inflation slowed to 0.8 per cent, the lowest since 2001.

With inflation so far below the Bank of England’s 2 per cent target, policy makers are under little pressure to raise the key interest rate from a record-low 0.5 per cent for now.

Governor Mark Carney said last week that any period of falling prices will be temporary and an expected pickup in inflation at the end of the year means the next move in borrowing costs is likely to be an increase. The report "reinforces belief that the Bank of England will most likely hold off from raising interest rates until the second quarter of 2016," said Howard Archer, an economist at IHS Global Insight in London.

The pound was down 0.7 per cent at $1.5547 as of 10:04 a.m. London time. The 10-year gilt yield was at 1.89 per cent, down 6 basis points. Investors pared bets on when the benchmark will rise, ruling out an increase before the second half of 2016, Sonia forward contracts show.

Easter holiday

The consumer prices index was affected by the timing of the Easter holiday, with air and sea fares having the biggest downward contribution to the annual rate. Food prices fell 3 per cent in April from a year earlier, while fuels and lubricants plunged 12.3 per cent. The 0.1 per cent annual drop in prices is the first since the official data series began in 1996. Based on an historical series constructed by the statistics office, it's the first decline since 1960. Prices rose 0.2 per cent from March. Retail-price inflation held at 0.9 per cent in April, the lowest since November 2009. Chancellor of the Exchequer George Osborne described the annual fall in consumer prices as "good news for family budgets" and said it should not be mistaken for "damaging deflation."

“Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing,” he said in a statement. “Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them should they arise.”

Separately, the ONS said producer prices rose 0.1 per cent in April and were down 1.7 per cent from a year earlier. Input prices rose 0.4 percent on the month and were down 11.7 per cent from a year earlier. Crude oil was the biggest driver of the annual drop. House-price growth accelerated to an annual 9.6 percent in March from 7.4 per cent in February, a separate report Tuesday showed. Values in London rose 11.2 per cent from a year earlier.

Bloomberg