Inflation hits lowest level in 50 years
THE UK economy was in dire straits today as inflation dipped to its lowest level in almost 50 years.
The Retail Prices Index (RPI) - which measures inflation used in pension payments and housing costs - fell to zero from 0.1 per cent in February.
Britain now faces a damaging period of deflation if worried consumers wait for prices to drop further, fuelling a vicious circle of lower prices and demand.
Experts had predicted RPI would slump into negative territory by as much as minus 0.7 per cent due to dramatic falls in interest rates and house prices.
But it is still the weakest reading since March 1960 which observers say is a worrying sign - given its key role in wage negotiations and pension payments.
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The Consumer Prices Index (CPI), which the Bank of England uses to set interest rates, rose higher than expected to 3.2 from 3 per cent, according to the Office for National Statistics figures.
The rise went against predictions of a sharp drop.
Bank of England Governor Mervyn King has therefore been forced to write a letter to Chancellor Alistair Darling explaining why inflation is still more than 1 per cent above the Government’s 2 per cent target.
Mr King said the “somewhat higher than expected” rise in CPI was likely to be due to the lower pound being passed on to consumers on goods containing a large proportion of imported components.
He expects CPI to fall back below the 2 per cent target in the coming months as the impact of lower gas and electricity prices come through and the continuing recession bears down on demand.
Transport prices also added to the inflation rise, with the average price of petrol rising by 3.2p a litre to 89.5p a litre.
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While the UK is not seeing deflation yet in the official measure, negative RPI - which is growing ever closer - will have serious implications for the country, not least because of its role in wage settlements.
It is also used as the basis for annual rises in State pension payouts and other benefits, as well as annuity payments for private pensions, plus rates for index-linked savers among others.
RPI has been dragged down more than CPI because it also includes mortgage payments and housing costs which have dropped dramatically amid the recession.
With a prolonged period of deflation still expected, Adrian Kidd of financial advice website Rubii.co.uk said the ONS figures were like "a stay of execution rather than the rising of a new dawn" for Britain's struggling pensioners.
He added: “While many families have welcomed the fall in the cost of living, for the millions of pensioners who have saved assiduously and planned for their retirement, it has been a torrid six months.
"First they have watched helplessly as consecutive interest rate cuts have blitzed their savings. Now they are teetering on the precipice of deflation with very few options available to them.
“For those pensioners who already have inflation-linked annuities, they have no choice but to sit it out and hope for the best. For those approaching retirement it is very much a lottery at the moment.
The preferred route would be to defer purchasing an annuity for as long as possible, but for many who can no longer rely on their savings as income, an annuity may be the only option now available to them.
“Many pensioners must feel like they’ve been left hung out to dry.”
Mervyn King, Governor of the Bank of England, will give his views on inflation and the UK’s economic prospects when he is grilled by MPs on the Treasury Select Committee later this morning.
