So much for Ed Miliband’s ‘cost of living crisis’. UK inflation, as measured by the CPI index, has just fallen to zero (pdf). Even this figure masks better news: food prices are actually falling, by 3.4 per cent over the last 12 months. The cost of motor fuel is down by 17 per cent, mainly thanks to collapsing oil prices.
Crucially the price of such essentials should keep falling – as the below forecast from Citi (pdf) shows:-
Now, should we worry about ‘deflation’? There are some economists who say this is a real problem because if things get cheaper than punters put off purchases. There is zero evidence of this happening in the UK. Indeed, according to Citi (pdf)
…the opposite is the case, with falling prices spurring increases in confidence and purchases. For example, the February consumer confidence survey showed that the share of people who believe it is now a good time to make major purchases rose in February to the highest since 2007, while the figure for expectations of major purchases in the coming 12 months next year rose to the highest since 2003. Weakness in prices reinforces our view that consumer spending will grow robustly this year.
Ker-ching! Add this to record employment and mortgages at a record low and you have the perfect economic conditions under which to fight an election.
UPDATE: Contrary to what George Osborne is suggesting, this is not a first for the UK economy. Prices fell in the late 1950s and, measured by the RPI index, after Alistair Darling’s VAT cut in 2009.
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