Inflation Falls As Expected

Published / Last Updated on 22/04/2020

Due to the coronavirus lockdown, the UK’s inflation rate fell to 1.5%pa in March, due to lower clothing and fuel prices.

The Office for National Statistics (ONS) reported a fall of 1.7%pa in February for The Consumer Prices Index (CPI).  Mark Hardie, Head of Inflation said: “there were signs of people spending less in shops and more on food just before the lockdown”.

As the economy shrinks, many economists fear inflation could fall to 0.5%pa in 2020.

The ONS reported that the price of clothes and shoes in March 2020 also fell by 1.2% and average petrol prices stayed at 119.4p per litre in February and diesel at 123.8p.  Oil prices fell 75% from the start of the year at £13.00 a barrel and indeed fell further yesterday to $3 a barrel.

CPI stays below the Bank of England’s 2%pa target for inflation and the bank's Monetary Policy Committee (MPC) looks this at when setting the base interest rate and what it charges commercial banks to borrow money with a direct effect on what consumers pay to borrow and what interest they can get on savings.

Last month saw rates cut from 0.25% to 0.1% to help the economy during the coronavirus pandemic and are at the lowest level seen.  The Bank of England said it would increase its holdings of UK government and corporate bonds by £200 billion to help lower the cost of borrowing.

Comment

We are in diffcult times and until a vaccine os found for covid-19 or a treatment to alleviate symptoms and a gradual return to a normal, functioning economy, we can expect a period of low inflation and low borrowing costs.  It also means it is an extremely cheap time for the government to borrow money to pay for all of this.

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