Britain is on the cusp of a period of deflation. It is the first time on record that inflation, measured by the consumer prices index, has hit zero, since the measure was created in 1989. This has three implications, two of them obvious, one less easy to assess.
The first is that living standards will rise. Average earnings are growing by just less than 2% a year, so with prices not rising at all people will find their wages and salaries go further.
The second implication is that there is likely to be a further delay before the Bank of England raises interest rates.
The latest fall in inflation came as no surprise to Threadneedle Street but its nine-strong monetary policy committee is going to be in no hurry to raise the cost of borrowing.
That’s because it will want to see what zero inflation does to wage bargaining. At the moment, it is assumed that the fall in the cost of living is temporary and that inflation will pick up later this year.
But it would be a different story if low inflation led to less generous pay settlements. If that were to happen, deflation could become tough to shift, as has been the case in Japan.
