Inflation measure turns negative

21/04/2009 12:12:32

UK annual inflation measured by the Retail Prices Index (RPI) went negative in March for the first time since 1960, to -0.4%, down from zero in February. RPI includes mortgage costs, which have fallen following the Bank of England's reductions in interest rates.

The Consumer Prices Index (CPI), fell in March to 2.9% after February's unexpected rise to 3.2%, the Office for National Statistics (ONS) said.

The official CPI figure is still well above the government's target of 2%.

The ONS said that the biggest downward pressure on inflation had come from energy prices as the price of oil was significantly below the level it had been in the same month last year.

Rob Pike, an economist at the ONS, said further reductions in energy prices would have an effect on April's figures.

UK inflation is still set to drop a lot further

Jonathan Loynes, Capital Economics

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"Clearly on the horizon there are downward pressures," he told the BBC.

Vegetable imports from Spain revived, sending vegetable prices lower, after being hit in the previous month by poor weather conditions.

Transport costs also fell as a result of lower fuel prices, which also fed into lower air fares.

Falling wages

Items in the ONS basket that were more expensive included the games, toys and hobbies category, with the price of computer games rising.

The price of clothing was also up from a year ago, with women's outerwear a particular driver.

While the CPI is important as the rate that is targeted by the Bank of England's interest rate-setters, the RPI is used by many companies as the starting point for wage bargaining.

The RPI is also the figure that determines what happens to benefits and the basic state pension.

The figure used for pensions will be the one that comes out in September, although there is a minimum increase of 2.5%.

There are signs that inflation could fall further before then.

"We suspect that the weakness of retail spending and activity in general will bear down strongly on core inflation in time," said Jonathan Loynes at Capital Economics.

"UK inflation is still set to drop a lot further and the threat of a broader bout of deflation has not evaporated."