Inflation in the UK turns negative

Figures show that for the second time this year, the UK inflation rate has turned negative, falling to -0.1% in September.

CPI rates falls below zero again

These figures refer to inflation as measured according the Consumer Prices Index, which tracks the price of a commodity bundle or market basket – that is, a set list of basic, representative household goods.

Inflation according to the CPI has stayed either at or around the zero market for much of this past year, first dropping into the negative in April. April marked the first time

The Bank of England ‘s target of 2% inflation, which was last reached in late 2013, is not getting any closer, it appears.

Some of the main contributors to the September drop are thought to include:

– Falling prices at the pumps,

– Falling household gas prices (after British Gas cut their energy bills by 5% twice this year)

– Falling food prices, and

– Slowed growth in clothing prices

Other factors include airline flight costs, that as a matter of course tend to drop after the Summer, though analysts are predicting a shorter fall than we saw last year, when plummeting oil costs made a big difference.

How the forecasts match up to the reality

The forecasts in the run up to these figure being released were somewhat varied, with many analysts predicting (and indeed hoping) for the rate to remain at zero.

Alan Clark of Scotiabank, however, predicted the drop correctly and forecasted an increase to happen early next year.

He said: “we expect CPI inflation to slip back into negative territory in September (and stay there in October) before powerful base effects start to propel inflation back up towards 1% by the new year.”

The Bank of England, however, put back their forecast for an increase up to 1% until spring next year, in a statement released last week.

Hargreaves Lansdown economist Ben Brettell commented on the drop saying that it relieved pressure on the Bank of England to “lift interest rates”. He expects CPI inflation to increase steadily over the next few months.

Brettell questioned the current government ‘s claims that the economy is steadily strengthening, saying that “core inflation, which strips out volatile components like food and energy, also remains weak 1.0%”, which he said “offers little suggestion that underlying inflationary pressures are building the UK economy, despite continuing strength in wage growth.”

Effects on benefits and welfare

The recent drop means that benefits such as those liked to disability care, which are linked to inflation, won ‘t be rising unless the government implements a policy change or some kind of independent mechanism to uprate them. The same applies to those on public sector pensions that are also linked to CPI.

Katie Schmeucker, of the Joseph Rowntree Foundation, expressed concern about the way that the government has committed itself to using CPI inflation as the only uprating measure for benefits at this stage, describing the move as “quite risky”.

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