Deflation makes a comeback

Inflation has hit negative territory and deflation is here. The March inflation rate as measured by the Retail Prices Index (RPI) fell to minus 0.4% from February’s rate of 0%, signalling the arrival of a phenomenon last seen almost half a century ago.

Inflation last hit a lower rate in March 1960 when it was minus 0.5%. In the 13-month period between April 1959 and March 1960, RPI inflation recorded a negative figure in seven months and 0% in another.

A number of factors contributed to the latest figure. Mortgage interest payments made the biggest contribution as bank interest rates fell from 1.5% to 1%. Meanwhile, both gas and heating oil prices fell this year but rose a year ago.

And food prices, especially fresh vegetable and fruit prices, were below the level of a year ago.

With interest rates falling further since, and food prices set to drop, it looks likely that the inflation figure will stay negative for at least another month. Under the Consumer Prices Index (CPI), which excludes housing costs and is the government’s preferred measure, inflation was down to 2.9% from 3.2%.

This is still well above the 2% target for the Bank of England’s monetary policy committee in its deliberations of setting interest rates.

The biggest downward pressure on the CPI came from energy prices because the price of oil was significantly lower.