Welcome to deflation

Welcome to deflationThe Consumer Prices Index (CPI) measure of price inflation has turned negative for the first time since records began. Welcome to deflation.

For the year to April, CPI price inflation was -0.1%.

To put this level of deflation in context, a basket of goods and services which cost £100 last April would cost £99.90 now.

It’s been estimated that the last time the CPI measure of price inflation was negative was in March 1960, when inflation was -0.6%.

According to the Office for National Statistics, inflation has fallen due to lower air and sea fares, and also food prices. The official figures show transport costs were 2.8% lower in April than the same time a year ago. Food was 3.0% cheaper than a year earlier.

Bank of England governor Mark Carney has said that price inflation is expected to remain very low for the next few months. He added: “over the course of the year, as we get towards the end, inflation should start to pick up towards our 2% target”.

Deflation is usually considered to be bad news for the economy, as it encourages consumers to put off their buying decisions in the expectation of lower prices in the future.

However, Chancellor George Osborne has said this deflation should not be mistaken for “damaging deflation”.

He added, “Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them, should they arise.”

Really damaging deflation is something which continues for the long-term, so this is probably not going to be particularly damaging to the British economy.

We share the view of the Bank of England that price inflation is likely to enter positive territory within a matter of months, and then return towards its target of 2% later this year.

In the meantime, these latest figures should serve as a reminder to investors to consider inflation and the long-term impact of rising prices on their Financial Plans.

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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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