Inflation has fallen to zero for the first time on record in Britain, boosting incomes in real terms and handing the chancellor a pre-election advantage.
The consumer prices index dropped in February from 0.3% in January, bringing the UK to the brink of a spell of deflation that is expected in the coming months.
Economists had forecast a smaller drop to 0.1% but a deep oil price slump and a fierce price war being fought out by supermarkets brought fuel prices down by 16.6% over the year and cut food prices by 3.4%, according to the Office for National Statistics.
Confirmation that prices were flat over the year allowed Chancellor George Osborne to question Labour’s claim that the UK is in the midst of a cost of living crisis.
Osborne said zero inflation was “a first for the British economy” and good news for family budgets.
Taking to Twitter to mock Labour, he added: “Prices are frozen and as the recovery from Labour’s Great Recession strengthens, their economic argument has literally come to nought.”
Real terms pay fell for six straight years between 2008 and 2014, as inflation consistently outpaced wage growth. However, that trend has been in reverse since late 2014 giving households a boost. The latest figures showed wage growth running at 1.8% including bonuses in the three months to January.
The consumer prices index – Britain’s official inflation measure – has not fallen to zero since comparable records began in 1989. However, unofficial estimates suggest it might have been lower in 1960.
Overall price falls are expected later in the spring as the global oil price slump continues to feed through to lower prices at the petrol pump and cuts in some utility bills. A lower oil price also cuts costs for manufacturers and food producers.
The strength of the pound against the euro, the UK’s main trading partner, makes imports cheaper and could also bring down inflation in the coming months.
Inflation was last close to the Bank of England’s 2% target in June 2014, when it registered 1.9% and the latest figures keep any rise in interest rates firmly off the table.
“UK inflation is dead,” declared Vicky Redwood, chief UK economist at Capital Economics after the figures were published.
“The UK is now within a whisker of deflation. 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.
“Inflation is then likely to remain around zero/slightly negative for the rest of the year.”
She added: “We still think deflation in the UK will be a ‘good’ development, giving household incomes a welcome boost and supporting the economic recovery this year.”
The latest spell of weak price pressures in the UK has triggered a division of opinion at the very top of the Bank of England.
Mark Carney, the Bank’s governor, has argued that while the country should experience overall falling prices during spring, Britain is not heading for the dangerous deflationary spiral feared in the eurozone.
Deflation can become entrenched and difficult to escape once businesses and consumers delay spending plans because they expect prices to fall further still.
However, the Bank’s chief economist, Andy Haldane, said last week that in his view, policymakers could be underestimating the threat. As a result of inflation “dropping like a stone”, he said it could prove necessary for interest rates – already at an all-time low of 0.5% – to be cut further.
Carney, on the other hand, has argued that responding to the recent fall in inflation with a rate cut would be “extremely foolish”.
It suggests that the Bank’s nine-strong rate-setting Monetary Policy Committee is becoming ever more divided on the appropriate timing of the first rise in interest rates, which have been on hold at their historic low since March 2009.
As recently as December, two members of the MPC – Martin Weale and Ian McCafferty – voted for a 0.25 point rate hike, before dropping the call in January and at subsequent meetings.
In China, expectations are mounting that the central bank will pump further stimulus into the economy after the latest signs of a slowdown.
Activity in China’s factories was the slowest in 11 months in March as new orders fell. The HSBC/Markit China manufacturing PMI dropped to 49.2 from 50.7 in February, where anything below 50 indicates contraction. It was weaker than expected, with economists polled by Reuters forecasting 50.6 for the PMI.