LONDON – Britain saw consumer prices fall in April for the first time since 1960, official figures showed Tuesday, but few economists think the annual drop will be anything but short-lived.
The Office for National Statistics said Tuesday that consumer prices were 0.1 per cent lower than the year before, mainly weighed down by cheaper air and sea travel. Lower oil prices likely played a role in that as did the relatively early Easter this year.
According to the statistics agency, April’s fall was the first decline since 1960. Though consumer price inflation figures only began to be compiled in the mid-1990s, the agency’s number crunchers have used historical information to calculate rates further back in time.
With oil prices appearing to have bottomed out over the past few months, most economists think the country is not heading for a sustained period of falling prices, or deflation.
Deflation can be a concern as it can weigh on economic activity if consumers put off spending and businesses fail to invest. Fears of deflation were largely behind the European Central Bank’s decision this year to launch a 1.1 trillion-euro ($1.2 trillion) monetary stimulus.
Samuel Tombs, senior U.K. economist at Capital Economics, thinks the U.K.’s drop in consumer prices will only last a month as Easter-related effects turn positive, though it could take “another couple of years” before inflation returns to the Bank of England’s 2 per cent target.
The Bank’s governor, Mark Carney, has been sanguine about the recent low rates of inflation and has noted that it can have a positive effect as wages increase faster than consumer prices.
“Alongside falling unemployment, low prices, especially for fuel, have boosted consumer spending, which is consequently providing the main thrust to economic growth at the moment,” said Chris Williamson, chief economist at financial information company Markit.
Given the rosy growth backdrop, most economists think that the Bank of England will start raising interest rates sometime in 2016, having kept its main rate on hold at the record low of 0.5 per cent since March 2009.