Analysts forecast dip into deflation as CPI hits zero

Analysts forecast dip into deflation as CPI hits zero

This morning’s (24 March) announcement that the main measure of inflation, the consumer prices index, fell to 0 per cent in February from 0.3 in January led various industry figures to predict that the UK will fall into deflation this month.

Vicky Redwood, chief UK economist at Capital Economics

Ms Redwood said the main driver of the fall was a drop in the ‘core’ inflation rate from 1.4 to 1.2 per cent, probably reflecting the indirect effects of lower energy prices caused by depressed oil prices.

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“It looks odds on that inflation will turn negative in March, when the cut in gas prices by British Gas will show up in the inflation figures for the first time,” she predicted, adding that inflation is then likely to remain around zero or slightly negative for the rest of the year.

“We doubt that this will turn into more serious and ingrained deflation, given that inflation expectations seem well anchored. We still think that deflation in the UK will be a ‘good’ development, giving households’ incomes a welcome boost and supporting the economic recovery.”

Chris Williams, chief executive at Wealth Horizon

The online investment service’s boss stated that the UK is now experiencing ‘noflation’, driven by factors including the sharp decline in the oil price and sliding prices of a number of recreational goods.

“The real question for investors is how long this scenario lasts. Certainly, this is not a normal environment and investors need to be aware that inflation will not stay this low forever.”

He suggested that having a diversified portfolio which can grow above a more ‘normal’ level of inflation - such as the 2 per cent target - should still be a key goal.

Adrian Lowcock, head of investing at Axa Wealth

Mr Lowcock pointed out that the downward pressure was not offset by significant rises elsewhere, with expectations for inflation to remain close to zero for some time and possibly turning negative.

“While the annual figure is likely to remain low, monthly inflation changes are expected to begin to rise again in the coming months as the falls in prices works through the system.”

He stated that investors in this environment should not assume that inflation will remain low or non-existent forever and should keep focused on the long-term effects even mild inflation has on investment returns, saying in this environment “equity income continues to look attractive”.

Calum Bennie, communications manager at Scottish Friendly

The writing is on the wall that the economy will be in deflation within a couple of months, says Mr Bennie, which will mean the Bank of England may find themselves under increasing pressure to cut interest rates.

“The outlook for savers is not good and those looking to build up deposits will have to scurry around to get decent rates on cash accounts. Alternatively, for a long-term investment, now could be the time for people to consider stocks and shares, or investment Isas.”