Britain is sliding towards its first bout of negative inflation in more than half a century, the Bank of England has said, but strong economic growth should stave off the threat of a deflationary spiral.
The slump in oil prices and falling food prices is likely to push inflation to zero in the second and third quarters of 2015, probably dipping into negative territory for one or two months this spring, the Bank said in its February inflation report.
But the Bank also revised up its forecasts for growth in 2016 and 2017, helping push sterling to a seven-year high against the euro, with one euro worth 73.71p. The pound also rose 1% against the dollar to $1.5388 as investors bet on a rate hike coming sooner than expected, later this year or in early 2016.
UK inflation was 0.5% in December, well below the Bank’s 2% target. Speaking as it published its latest quarterly inflation report, the Bank’s governor, Mark Carney, said: “It will likely fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year.”
The last time headline inflation was negative in Britain was March 1960, according to the closest comparable data from the Office for National Statistics.
The Bank expects the slump in oil prices and falling food prices to keep inflation low in the short-term. However, lower oil prices – which have more than halved since last summer – are expected to significantly boost consumer spending. This in turn should fuel growth and push inflation higher over the medium term.
“The combination of rising wages and falling energy and food prices will help houseshold finances and boost the growth of real take home pay this year to its fastest rate in a decade. This will support solid growth in consumer spending,” Carney said.
He described the sharp fall in oil prices as “unambiguously positive” for the global economy and for the UK, and said the public should be prepared for an increase in borrowing costs. Rates have been on hold at an all-time low of 0.5% since March 2009.