Cost of living to drop as UK gets good deflation

Falling oil and food prices are expected to give a welcome boost to shoppers. 

 

Official data should show prices falling 0.3 per cent in the 12 months to March and 0.1 per cent in the year to April, according to forecasts from the Centre for Economics and Business Research (CEBR).

 

This will be the first time the UK consumer price index has ever fallen into negative territory.

 

For 2015 as a whole, the analysts believe inflation will come in at a record low of 0.4 per cent.

 

“Record low inflation and rising earnings are going to drive the UK economy ahead this year, as households find themselves with more money to spend on discretionary purchases,” said CEBR economist Scott Corfe.

 

“While the economy isn’t anywhere near as balanced as policymakers want – growth is still overwhelmingly driven by household spending rather than exports and investment – a consumer-led recovery may be just what we need this year to maintain momentum.”

 

He predicts the economy will grow by 2.6 per cent this year.

 

Deflation can squash economic growth by increasing the burden of debt on households and firms, and encouraging them to postpone spending. But the CEBR believes the UK will avoid that fate.

 

“Unlike in the Eurozone, where there is a risk of a negative spiral of falling prices and weakening economic performance, the UK’s bout of deflation is expected to be short-lived and virtuous, as the declining prices of essentials increase household spending power,” it reported. “Earnings will grow comfortably above inflation over the coming months.”

 

The forecasts could also provide a boost for the government. Despite a  fall in unemployment, low wage growth has hindered its efforts to convince voters that they have become better off since the last general election in 2010.