Listen to Pete Comley talk about the data on Share Radio:
CPI inflation remained at -0.1% in October – the first time prices have been negative two months in a row since this index was created in 1996. RPI declined to 0.7%.
Reasons for deflation
The key driver for low inflation remains the decline in petrol prices (linked to world crude prices). Petrol was 109p in mid-October this year compared with 127p last year. In addition food prices have also dropped over the previous 12 months with some further falls seen in October. For example, the cost of diary spreads was lower, as were certain meats like lamb and sausages, wine, seasonal vegetables including carrots and fruit such as grapes.
ONS also claimed that there was also “downward price pressures for university tuition fees”. This was not quite correct as most students know. More correctly ONS should have been pointing out that the rise in fees to £9000 has now worked its way through nearly all three years of degree stduents, and is no longer exerting such a strong positive impact on inflation – it has been adding up to 0.3% to the headline rate since 2012.
Balanced against these negative factors are the continued rise in service inflation +2.2%. Computer games and consoles were also up. ONS also talk about clothes price rises in October. Again clothes have produced some spurious impacts on inflation. These rises tell us more about the unusual lack of a increase in September than they do about October – this being probably related to slightly different patterns of retailer discounting in 2015.
The UK’s figures mirror those seen in many other developed countries. Inflation is also zero across the EU and in the USA. Indeed the average inflation rate for the G7 for 2015 looks like it will set a record low of around 0.3%. Precise records make it difficult to determine when price rises were last this low in so many developed nations simultaneously but it was probably in the Great Depression.
It is worth noting that inflation is not low everywhere in the world. It is higher in some developing countries, particularly those dependent on commodities such as Russia (16%) and Brazil (10%).
Outlook for inflation
The UK is going to continue to see low inflation rates for at least a few months more. However this will all change when the petrol price declines fall out of the calculation in the January data and CPI might then move closer to 1% again. However the exact levels for CPI for 2016 are difficult to predict, as they very much depend on what happens to crude oil prices. Some technical analysts are predicting further declines to $36. That could lead to petrol going sub £1/litre in the UK and a more persistent period of near-zero inflation.
You can read the full ONS report here.