Another month, another record low in consumer price inflation. January saw the annual rate of UK consumer price inflation (CPI) ease to a record low of 0.3%. This morning’s figures for February have revealed that UK consumer prices were unchanged over the last 12 months. However, the headline rate conceals diverging inflationary trends when looking at the price of goods and services. Within these two categories, it is a case of goods deflation (falling prices) and inflation (rising prices) for services.

The price of consumer goods fell by 2% year-on-year in February which compared with a decline of 1.5% in January. Last month’s 2% fall represented the fastest rate of decline since June 2002 (-2.3%) and compares with a long-term average rate of inflation of 1.7%. Meanwhile service price inflation has remained broadly unchanged at 2.4% over the last six months. This compares with a long-term average of 4.4%.

UK consumers are benefiting from the huge fall in oil prices since the middle of 2014.  This has fed through to falling petrol prices.  The latest figures note that Transport, Fuels & Lubricants (petrol & diesel) category reported annual price falls of 16.6% in February.  This represented a record rate of decline.  Meanwhile food prices fell by 3.5% y/y last month which also represents the steepest decline on record. It is noted that the annual rate of Core CPI inflation, which excludes food and energy prices, eased from 1.4% in January to 1.2% February. This is a more meaningful indicator to gauge deflationary fears within the UK economy.

In the months ahead the headline rate of CPI is expected to go into negative territory which will keep the Bank of England from raising interest rates in 2015. If as we expect one or two sub-zero readings materialise, we should prepare for a flurry of ‘UK enters deflation’ headlines.  While such a statement would technically be true the UK is not expected to enter the economically damaging deflation that afflicted the Japanese economy. The latter was characterised by falling demand whereas the disinflation in the UK is due to the huge fall in oil prices and falling food prices and not a fall in demand. This will pass with CPI expected to rise towards 2% over the next 2 years. Therefore genuine deflationary concerns within the UK should only materialise if Core CPI goes into negative territory. It is noted that the headline rates of CPI inflation in the Eurozone (-0.3%) and the Republic of Ireland (-0.4%) are already in negative (deflation) territory.