In the Bank of England’s Inflation Report, Governor Mark Carney asserted that inflation is likely to “fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year”. The last time consumer prices sank so dramatically was in March 1960.
In December 2014, consumer prices inflation was at its lowest level in the UK for the past two decades, with the latest reading showing that the cost of living has collapsed to 0.5%. It is 1.5% lower that the target level at 2%. The BoE Monetary policy committee (MPC) made assessment why actual inflation misses the target. The MPC estimates that two-thirds of the gap between the current inflation rate and the target is explained by sharp falls in food and energy prices. Accordingly, one third or 0.5% below the inflation threshold reflects overall soft inflation pressure which is caused by weak growth of consumer spending.
The latest BoE inflation report also contains a forecast which foresees that inflation in the UK is likely to keep on easing for several months.
Interestingly, the UK consumer price index fell into the negative territory over 50 years ago. In case the Bank of England boss’ outlook comes true, consumer prices will plunge into deflation.
