Figures set to show UK in deflation

Official statistics out today are set to show the UK is officially in deflation.

The retail prices index (RPI) is set to fall from the January level of +0.1 per cent to -0.7 per cent.

In September 2008, RPI stood at five per cent.

The consumer prices index (CPI) – which is used by the Bank of England as a target for setting interest rates – was at 3.0 per cent in January and is expected to fall to 2.5 per cent for February.

"We expect CPI inflation to fall to 2.5 per cent in February, its lowest rate for a year," said Jonathan Loynes at Capital Economics.

"RPI inflation should fall to something like -0.7 per cent. But both measures will fall much further over the coming months.

"We still expect CPI inflation to get all the way down to -1 per cent or so by the late summer, with RPI going as low as -4 per cent."

The Bank's target for CPI is two per cent, but the index is expected to continue its slide from the September peak of 5.2 per cent to under one per cent.

The central bank predicts CPI to fall below two per cent until 2011 – with an outside chance of the index falling below -1.0 per cent.

The rapid fall in inflation is due in part to the falls in oil prices – from the peaks at over $140 a barrel last year to the current level of around $50.

The recession has also slowed down the economy and inflation, along with falling interest rates cutting mortgage repayments, which are included in the RPI measure, but not CPI.

However, CPI is expected to become negative by the end of the year.

"We expect annual consumer price inflation to fall back substantially further over the coming months and to briefly turn negative during the second half of the year," said Howard Archer, chief UK economist at IHS Global Insight.

"Furthermore, there is clearly a risk that deflation could persist with damaging repercussions for the economy.

"However, we believe that this is unlikely to happen."

He explained the rise in VAT due for January would push up inflation, as would the weakness of sterling.

"Meanwhile, sharply falling inflation will provide a boost to the purchasing power of consumers, thereby providing some support to spending," Dr Archer said.

"However, we suspect that this support will be outweighed by the downward pressure increasingly coming from sharply rising unemployment and markedly lower wage growth."