Tuesday 14 July 2015 5:05 am

Inflation back to zero: Here’s what the analysts said

Falling clothing and food prices sent Britain back into "noflation" in June, down from 0.1 per cent in May, according to figures releases today by the Office for National Statistics.

Here's what analysts had to say:

Chris Williamson, chief economist at Markit, said:

Core inflation (excluding energy, food, alcohol and tobacco) also fell, down back to 0.8% from 0.9% in May, its joint-lowest since 2001. Oil prices fell during the month, supermarkets continued to compete aggressively on price and June saw the start of summer clothing sales.

The data therefore raise questions over the whether underlying price pressures are really picking up to the extent than the Bank of England is anticipating. The Bank expects inflation to start rising in earnest later this year, primarily due to the impact of low oil prices phasing out of the annual comparisons, and reaching its 2.0% target by 2017.

Attention therefore now turns to what’s arguably the more important wage growth data, published tomorrow. The Bank of England needs to determine whether pay growth will continue to accelerate as firms compete for staff, or whether low inflation will keep the overall rate of increase below levels that would normally worry the monetary policy committee into hiking interest rates.

Maike Currie, associate investment director, Fidelity Personal Investing, said:

These numbers come a day ahead of the UK employment figures expected to show average wages are rising. Coupled with low inflation, this means more pounds in people’s pockets and a boost to the UK consumer which should be positive for growth as consumer spending remains the backbone of the UK economy.

Howard Archer, chief European and UK economist at IHS, said:

We doubt that deflation will recur in the UK, although it cannot be completely ruled out if oil prices fall markedly anew (which seems unlikely). Oil prices actually peaked in June 2014 so the year-on-year drops in oil prices have likely peaked.

We believe it is most likely that consumer price inflation will hover around zero through the summer and then start heading gradually but decisively up from September. There is obviously the risk that there could be another very brief dip into deflation if oil prices extend their current softening.

Ian Stewart, chief economist at Deloitte, said:

With inflation close to its lowest ever levels and earnings rising at the fastest rate in seven years, the scene is set for an acceleration in UK consumer spending. Low inflation, cheap money and a strong jobs market suggest that the UK should continue to post decent growth, despite Grexit risks.

Rain Newton-Smith, the CBI's director of economics, said:

Price inflation remains elusive. While this is likely to persist in the coming quarter, inflation should rise relatively swiftly from the end of 2015, as the effect of past falls in oil prices fades.

Inflation of below 1 per cent over the rest of this year should give the MPC enough breathing space to leave interest rates unchanged at least until early 2016.

James Sproule, chief economist at the Institute of Directors, said:

Businesses and households will cheer another month of low inflation, which is delivering an unexpected boost to millions of businesses and consumers. The lower cost of essentials, such as transport, has given companies more money to invest, take on staff, pay down debts, increase wages or reduce prices. At the same time, lower household food and petrol bills are feeding through to higher disposable incomes, increasing consumer confidence and demand.

Given that job creation remains strong and wages are rising at their fastest pace for a number of years, Britain is in little danger of slipping into a period of entrenched deflation or ‘noflation’. The new living wage, which comes into force over the next few years, could eventually feed through to higher prices and reduce margins for some employers, so businesses should make the most of low inflation while it is here.

David Kern, chief economist at the British Chambers of Commerce, said:

The pattern of CPI inflation over the past few months supports our assessment that inflation is likely to remain around 0 per cent over the next few months. Our forecast is that inflation will edge up gradually from the end of this year, but will remain below 2 per cent until well into 2016. Low inflation is a welcome boost for households and businesses and will help to support the economic recovery.

The latest figures should help the Monetary Policy Committee to hold off on increasing interest rates until mid-2016 at the earliest. Keeping rates on hold will provide businesses with the stability they need to plan and invest without any unwelcome surprises.