U.K. Inflation: Time to Worry?

        By David Cottle
        Is deflation stalking the United Kingdon?
        The statistics are a little fuzzy but what we do know is that it's been at least 55 years since consumer prices last registered a year-on-year decline, as they did in the 12 months to April. They fell 0.1% according to official numbers released Tuesday.
        So is this it? Is the U.K.'s comparatively strong economic recovery about to be stymied by a deflation trap, with spending put off by consumers and businesses who suspect lower prices still lie ahead,
        Well. No, not if pretty much all the commentators are to be believed.
        They are keen to pin April's price weakness on the food and energy sectors -- weaker crude prices are hardly news -- and to claim that we are now seeing what may well turn out to be inflation's low point for this cycle. The timing of Easter may also have taken its toll.
        "The UK's deflation is likely to last for one month only," according to Capital Economics.
        "CPI should return to positive territory in May, as the effect of the shifting timing of Easter ceases to depress it and as the negative contribution from energy and food prices starts to fade," Capital Economics adds, while its analysts detect few signs that very low inflation is having malign economic effects, saying "consumers are undertaking, not delaying, purchases and wage growth is picking up."
        "Today's move into deflation is likely to prove short-lived and positive for growth. Falling prices raise consumer spending power and help keep interest rates low. This looks like the mild and benign variety of deflation which is good news for consumers and for growth," said Ian Stewart, chief economist at Deloitte.
        Now of course the Bank of England's governor Mark Carney cautioned back in February, and again last week, that inflation would remain close to zero for 2015, and that it was "more likely than not" that we'd see a negative print or two.
        Given his emollience -- the Bank of England thinks we'll be back up to 2% in two years -- you'd expect a muted market reaction, and you'd have been quite right. Sterling slipped a little, to $1.5531, after the figures, but soon recovered its poise. Ten-year Gilt yields fell 63 basis points to 1.90%.
        You'd be hard pressed to find someone who thinks deflation is here to stay. It's probably worth pointing out though, that core inflation, a measure which strips out volatile components such as energy, also turned in its weakest showing since 2001, rising just 0.8%.
        Deflation may not be something the U.K. has to fear, but pricing power is still incredibly weak, by any measure.
        (END) Dow Jones Newswires

        May 19, 2015 05:42 ET (09:42 GMT)

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