UK inflation turns negative

UK inflation slipped into negative territory again in September, driven by the falling price of food and reduced motoring costs.

The 12-month Consumer Prices Index inflation rate dropped to -0.1 per cent in September, down from 0 per cent in August. It is the second time the Office for National Statistics has reported negative inflation in 2015.

Food prices fell by 2.5 per cent during the period, the ONS says, while the price of motor fuels plummeted 14.9 per cent.

The ONS says: “These [two] groups have provided some of the largest downward contributions to the 12-month rate during 2015. In September 2015, the food and motor fuels groups in total reduced the CPI 12-month rate by approximately 0.8 percentage points. Historically, price movements for these products have been among the main causes of inflation.”

Between August and September the largest downward contributions to the headline CPI figure came from clothing and footwear, fuels and lubricants, and gas. There were no notable upward contributions to the shift in CPI between August and September, the ONS says.

Hargreaves Lansdown senior economist Ben Brettell says: “The usual suspect of falling fuel costs, coupled with smaller-than-usual increases in clothing prices pushed the UK inflation rate back into negative territory in September, once again putting no pressure on the Bank of England to lift interest rates.

“The rate of consumer price inflation has now been zero (or close enough to make no difference) since February. It’s expected to climb in the coming months as the big drop in fuel prices falls out of the year-on-year calculation, but core inflation, which strips out volatile components like food and energy, also remains weak at 1.0 per cent.

“This offers little suggestion that underlying inflationary pressures are building in the UK economy, despite continuing strength in wage growth. Figures due out tomorrow are expected to show pay growing at 3.1 per cent.”

However, Brettell warns downside risks to the UK economy “are still numerous”.

He says: “Global concerns, especially surrounding China and other emerging markets, have been well-documented, but there are also signs the domestic economy could be faltering. Last week’s PMI survey for the services sector, which accounts for around three-quarters of economic output, showed business activity growing at its slowest pace for more than two years.

“While the impact of rising wages remains notable by its absence in the inflation figures, I expect the Bank of England to focus on the risks and exercise caution on interest rates. I see them remaining at 0.5 per cent into the second half of next year, and quite possibly even longer than that.”