For the first time since the Office for National Statistics started collecting data, figures released by the department have today revealed that the UK’s economy fell into deflation. Prices have fallen overall across the economy, for the first time in fifty five years. The calculation is based on the Consumer Price Index which is show to have fallen by 0.1 per cent between April 2014 and April 2015.
The Governor of the Bank of England, Mark Carney, had predicted last week that there was likely to be what he thought would be a short-term dip in the Consumer Price Index, taking it into the negative, but he believes that the economy will rally shortly.
There were a few factors in this, admittedly relatively minor fall in prices, which include food, alcohol and fares for both air and sea travel. The drop in food prices was one which had been expected, and is likely to have come about as a result of supermarket price wars which have driven down the cost of some of the most popular staples. Alcohol prices fell as a result of the Chancellor’s reduction in the duty paid on beer, cider and whiskey which was announced in April’s Budget and has contributed to lowering of the prices of other types of alcohol.
The reduction in travel costs has been welcomed by independent professionals who have landed contracts abroad, which accounts for around 11 per cent of the membership of the Association for Independent Professionals and the Self Employed.
Marginal degrees of short-term deflation can be a positive thing for a country’s economy, and the Chancellor George Osborne was eager to reassure those who may be concerned that this could signal the start of a longer term trend. He pointed out that wages have seen a significant recent increase which is greater than has been apparent for years.
The combination of the fall in prices and the rise in wages will hopefully stimulate economic demand, with households being able to afford more on their monthly income. The markets seem to agree with this assessment of the situation, with risk averse trading not showing a marked increase in the light of Mr Carney’s warning meaning that the FTSE 100 closed 0.2 per cent up after the day’s trading.
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