Plunging prices for petrol, diesel, gas, electricity and clothes sent inflation to a four-year low of just 0.8 per cent in April, prompting fears that the economy is being battered more than expected by coronavirus.
Consumer price inflation, which tracks the movement in costs of a “basket” of goods that the average shopper tends to buy, almost halved from 1.5 per cent in March to 0.8 per cent in April. The consensus among economists was for a 0.9 per cent fall.
The sharp drop was primarily driven by declining oil prices which have in turn been caused by an unprecedented drop in demand for fuel as businesses shut down, people stay at home and airline fleets remain largely grounded. Oil prices have recovered to some degree after dropping rapidly in April.
The annual inflation rate of 0.8 per cent fell to its lowest level in more than four and a half years last month, well below the Bank of England’s target rate of 2 per cent, which is considered to be a sweet spot.
Bank of England Governor Andrew Bailey will now have to write a letter to the government explaining why the rate is more than 1 per cent below the target range.
Lower inflation is not always considered by economists to be a good thing as it can indicate a drop-off in demand for goods and services, as in the current crisis situation.
It raises the big fear for policymakers that inflation could turn into deflation, meaning prices begin to fall.
That has further negative impacts on the economy as shoppers could hold onto their money rather than spending it, in the rational expectation that prices will fall further.
Bank of England deputy governor Ben Broadbent said recently that it was possible that inflation could fall below zero by the end of this year.
Some of last month’s decline may be tempered in future inflation data by the fact that oil prices appear to have begun to stabilise.
But consumer prices in some parts of the economy may continue to drop drastically as producers and retailers try to offload stock that they have been unable to sell while people stay at home and reduce their spending.
Clothing prices, which fell between March and April, are expected to take a further tumble when shops considered non-essential are allowed to re-open again, potentially on 1 June.
Many high street retailers have huge stockpiles of spring/summer outfits and little time to sell them before they become irrelevant. Primark, for example, has close to £2bn of stock, much of it highly seasonal, in its warehouses and no website on which to sell it.
To tempt shoppers into buying much of that stock, retailers are likely to have to heavily discount it, meaning potential bargains, but a disaster for companies’ bottom lines. For pile-it-high, sell-it-cheap retailers, who have little room to take prices lower, that presents a problem.
Lower inflation will also increase pressure on the Bank of England to do more to stimulate demand in the economy and get businesses and shoppers spending again.
This is considered essential for the economic recovery, which the chancellor warned on Tuesday might not be swift, as had been hoped.
However, it is a difficult task for Bank policymakers. Their traditional policy “lever” is interest rates which are cut to make borrowing cheaper and thereby boost spending, and raised if it is feared prices are going up too quickly.
https://uk.finance.yahoo.com/