UK falls into deflation

Thursday 21 May 2015

New statistics show that the rate of inflation in the UK turned negative during April, meaning that the country has fallen into deflation.

According to the Consumer Price Index (CPI) from the Office for National Statistics (ONS), the rate fell to -0.1 per cent during April. Looking at comparable historic estimates, the ONS says it is the first time that CPI has turned negative since 1960.

The biggest contributor to the drop in the inflation rate is thought to be due to a reduction in sea and air fares. Transport costs were 0.5 per cent lower and food prices were down 0.32 per cent compared to the same time one year ago.

Over the next few months, Bank of England governor Mark Carney said he expects inflation will stay very low. Yet, he said that towards the end of the year inflation should begin to pick up and get closer to the Bank of England's two per cent target.

In terms of how deflation is likely to affect contractors, sole traders and other self employed people, the Association of Independent Professionals and the Self Employed (IPSE) posted its views on the matter.

IPSE chief executive Chris Bryce said: “The UK economy can cope with a brief period of deflation, but longer term deflation would start to indicate slackness in the economy and require intervention from the Bank of England and the government.

“However, the underlying strength of the labour market remains robust and data from IPSE’s quarterly Freelancer Confidence Index shows the majority of freelancers are optimistic about the economy’s future performance. We also know that average earnings for employees and freelancers continues to be ahead of inflation.”

Mr Bryce added that the British public are likely to be appreciative of the extra money that they will have due to the fall in consumer prices. He also said that the drop in air fares would also be beneficial to the one in ten self-employed people who frequently travel abroad for work.

Indeed, IPSE says that 11 per cent of its members worked abroad during the last 12 months. According to IPSE, business confidence among independent professionals has tripled over the last quarter and 83 per cent of freelancers expect their daily rates of pay to increase or remain stable over the next three months.

Commenting on the latest CPI figure, chancellor George Osborne said that it should not be considered to be “damaging deflation”.

He explained that the lower cost of living would be good news for family budgets, particularly as average wages seem to be beginning to rise.

By Victoria McDonnell

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