Inflation rates continue to drop amid growing concerns of deflation

A recent report from the Office for National Statistics suggests that the threat of deflation in the UK remains real despite a slower than expected decrease in the rate of inflation.

In January, the Consumer Price Index (CPI) fell from 3.1% to 3%, while the Retail Price Index (RPI) slowed to 0.1% from an already low 0.9% in December – the lowest RPI inflation rate since March 1960.  

According to the Office, the RPI – which reflects housing costs – took its biggest hit from a decrease in housing prices and low mortgage interest payments. 

A further drop in the RPI would be particularly costly for consumers and could signal a decrease in pension payouts and wages.   Many experts predict that the RPI could hit negative territory over the next few months, meaning that the UK could become embroiled in further economic turmoil brought on by deflation. 

The Bank of England is acting quickly to stop further haemorrhaging of RPI inflation rates, though any improvements brought on by a cut in interest rates has yet to be seen. 

Bank governor Mervyn King has suggested that the monetary policy committee will consider quantitative easing – a process whereby the government creates new money and pumps this money into the economy by investing in financial assets. 

Though a decrease in living costs might sound like an appealing alternative to a spike in inflation, deflation could have serious consequences for the UK economy at large.  If the price of goods begins to fall, distributors might defer purchasing products in anticipation of greater price drops.  This could result in a virtual buying freeze whereby consumers hold-out for lower prices until consumer demand grinds to a halt.     

Source: Guardian.co.uk