Put the “Britain slides into deflation” headlines on hold for another month. Higher petrol prices meant that the annual inflation rate in the UK in March was zero, the same as it was in February.
Technically speaking, even had the Office for National Statistics announced that last month’s inflation rate had been negative, it would not have qualified as deflation.
Deflation is a generalised and persistent fall in prices. One month of negative inflation caused for the most part by a halving of the cost of oil is neither generalised nor persistent.
Even so, the ONS data provides plenty of evidence that upward pressure on inflation in Britain is non-existent. The trend in inflation is unambiguously downwards.
That’s apparent from the government’s preferred measure of the cost of living, the consumer prices index, where the annual inflation rate has fallen from 1.6% to zero since last July.
More significantly, so-called core inflation has followed a similar trajectory. Core inflation excludes items such as energy, food, alcohol and tobacco, whose prices can shoot up and down as a result of global factors or changes in excise duties. As such, economists consider it to be a good guide to the underlying direction.
Core inflation was 1.9% in August last year, but has fallen steadily ever since to stand currently at 1%. This might not classify as deflation, but there is certainly plenty of deinflationary pressure in the UK.
What does this mean? It means that the Bank of England is under absolutely no pressure to tighten policy. Indeed, the trend in core inflation suggests that the Bank’s chief economist, Andy Haldane, is right to suggest that Threadneedle Street should keep the option of providing more stimulus open.
It means that living standards are rising, because earnings are growing by 2% while prices are not rising at all.
Things could now go in one of two ways. A longer period of low interest rates and rising real incomes could ldrive faster growth, leading to employers offering higher wages to attract and retain staff.
Alternatively, low inflation could make employers even meaner with the pay deals they offer their workers. If annual average earnings start to fall rather than rise, deflation would become a reality.
