The UK Economy Enters Negative Inflation

shutterstock_230949013Inflation in the UK has turned negative for the first time in more than half a century, providing a boost for household finances by lowering, amongst other things, food and energy prices. The Office for National Statistics (ONS) conclude that falling costs in transport services (particularly air and sea fares) have played a significant role in the reduction.

However, the latest data has prompted discussion among economists about whether this is actually a period of negative inflation rather than deflation and whether it could actually have an adverse effect on the economy.

But what’s the difference?

Negative inflation – this is a when the annual inflation rate turns negative, with an accompanying fall in consumer prices. Typically, this makes us all feel better off and gives us extra money to spend in other areas of the economy.

Deflation – a decline in prices, often caused by a reduction in the supply of money or credit. This can be caused by a decrease in government, personal or investment spending.

While many will welcome negative inflation, savers will be hit the hardest as interest rates will remain low. Some economists are arguing this is a warning of the underlying weakness of the UK’s economic recovery, and concerns will increase if the period of negative inflation continues.

Those potentially benefitting the most are pensioners and others who have fixed increases. The “triple lock”, which ensure pensions increase by whichever is the highest between inflation, wages or 2.5%, saw state pensions rise by 2.5% in April.

Workers on the national minimum wage will also see an increase of 20p an hour (the biggest increase in seven years) though this will only come into force in October 2015.

Whatever your personal views, this is undoubtedly good news for the economy (at least for the time being), but any prolonged period of negative inflation could be damaging. It is expected that inflation will bounce back later this year when oil and food prices start to increase. Watch this space.