The British economy is heading for a spell of deflation as official figures are expected to show that inflation dropped to 0.1% last month.
Analysts expect the UK’s consumer price inflation figure for February to fall from 0.3% in January, driven by lower energy and food prices. Some economists think the monthly update from the Office of National Statistics could already show deflation.
According to analysts at investment bank Credit Suisse, Tuesday’s data is likely to show CPI at 0.1%, with energy prices falling 10% from February last year after cuts to gas prices took effect.
Capital Economics thinks the rate will hit zero with Vicky Redwood, its chief UK economist, adding that the consultancy “would not rule out a negative reading”.
The inflation fall is likely to postpone further an increase in interest rates, which had been expected this year, with some in the Bank of England raising the possibility of a cut from the current historic low of 0.5%.
Andrew Haldane, the Bank’s chief economist, last week suggested interest rates could be cut to zero in coming months to head off the threat of deflation, saying that the monetary policy committee should worry that inflation had “dropped like a stone”.
Haldane said the committee believed inflation would remain close to zero in the near term before rebounding in the next two years. He added: “The risks to inflation at that horizon are plainly two-sided. But my personal view is that these risks are skewed to the downside. In my view, that means policy needs to stand ready to move off either foot in the period ahead.”
While Haldane’s words helped push the stock market to new highs, with the FTSE 100 index breaking the 7,000 barrier on Friday, his intervention was at odds with the recently expressed view of Mark Carney, the Bank’s governor.
Carney had warned this month that it would be “extremely foolish” to cut interest rates. He told the House of Lords economic affairs committee that low oil prices would have an effect on the economy long before a cut in interest rates kicked in.
“The impact of that extra stimulus … would happen well after the oil price fall had moved through the economy and we would just add unnecessary volatility to inflation. That would be foolish,” he said.
The Office for Budget Responsibility slashed its annual inflation forecast for 2015 down to 0.2% last week. Inflation as measured on the alternative retail price index, which includes housing costs, turned negative for a period in 2009, but this would be the first spell of deflation under CPI for 50 years.