UK inflation at zero and rate has been falling faster than in eurozone
Inflation fell to zero in February 2015; down from 0.3 per cent in January. Once more the figure came in lower than expectations, on this occasion for 0.1 per cent (including the Bank of England in their latest Inflation Report).
CPI records only began in 1989, but ONS projections show figures last lower in the 1960s. (Though this was a different world, with unemployment close to 1 per cent; really the likelihood is that we have to go back to the 1930s for a comparable episode.)
As is the norm now, politicians, city economists and other commentators have been putting it about that whatever the outcome, this is good deflation. They point to core inflation, and stress that we are very far from the eurozone position where they concede deflation may be bad.
But core inflation is an erratic figure, and a couple of small gains over December and January, meaningless. This month it fell back to 1.2 per cent from 1.4 per cent in January; apart from November last year, it was the lowest figure since 2008. A year ago core inflation was 1.7 per cent and two years ago it was 2.3 per cent, indicating a steady and ongoing decline. Moreover at 1.2 per cent core inflation is close to what would qualify for an open letter for the headline figure, hardly rude health.
Eurozone inflation was -0.3 per cent (with negative rates in 20 member states), and core inflation was 0.7 per cent, so the UK headline position is a little less bad (NB only a little, and see student fees below). But the rate of change in inflation in the UK is faster. Just over the past six months UK inflation has fallen 1.5 percentage points, from 1.5 to zero per cent. Over the same period, EZ inflation fell 0.7 percentage points (i.e. half as much), from 0.4 to -0.3 per cent. Nor is this faster decline related to oil prices. The first chart shows the change in inflation by the various headline categories of goods and services.
Change in inflation rate, February 2015 from August 2014, percentage points:
UK inflation is falling faster than EZ inflation in all categories, except a miniscule difference for miscellaneous, a marginally lower rise in communications and a rise in clothing (which is very erratic in the UK). Inflation is falling a little faster in the UK than EZ for housing water electricity, gas and transport – where oil prices have their main impact on energy bills and petrol – but only just. The bigger differences are in other categories.
For reference the actual inflation rates in each category are shown below.
CPI inflation, annual rate:
On this view, UK inflation us still above the EZ in most categories (albeit differences relatively small). A key exception is food prices falling by a record -3.3 per cent on the year in the UK, potentially related to the arrival of overseas discounters. In the other direction UK inflation is supported heavily by education, as the large increase in student fees continues to work through. The chart is cut-off at 5 per cent, the actual figure is 10 per cent; NB this accounts for 0.2 percentage points of UK inflation, and excluding student fees we would be in deflation and pretty much in the same place as the eurozone.
From a political point of view, to concede bad deflation is to concede underlying fragilities to the economy that are at odds with a political campaign that is putting the economy centre stage. But the headline figures, underlying detail and international comparisons show a picture of widespread and ongoing deflationary pressures. For their origins we need look less into the future for signs of delayed consumption, but into the past to the unprecedented decline in earnings and incomes. With any recent gains in real earnings driven mainly by falling inflation rather than rising earnings, these are very much deflationary conditions. A renewed round of low pay rises is a very real threat.
As Frances O’Grady said this morning:
“With deflation on the horizon, the Chancellor’s plans for extreme cuts after the election look more and more like a suicide note for the UK economy”.