Inflation falls to 0%. So what does that mean?

Official stats reveal prices are neither rising nor falling

Inflation has fallen to 0% - the lowest since records began - Office for National Statistics figures released this morning show.

Many analysts had expected a much smaller drop in the CPI rate of inflation for February, from 0.3% in January.

The news means it’s likely the UK will suffer deflation in the next couple of months, something Bank of England governor Mark Carney has warned about.

Rain Newton-Smith, director of economics at the CBI, said despite inflation dropping to zero we’re not likely to see prices drop for a prolonged period, particularly as the pressure from lower oil prices fades.

“While lower oil prices are cutting costs for businesses, and leaving households with more money in their pockets, North Sea oil producers are taking a hit. The measures to support the industry in the Budget will help address concerns over job losses and investment freezes, but it is not out of the woods yet.

“With the Monetary Policy Committee still alert to the risk of very low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

The Institute of Directors said low inflation means governments must be that much more careful with decisions on tax and spending, as very low, or zero, inflation means miscalculations cannot be eroded in future years by inflation.

James Sproule, chief economist of the Institute of Directors said: “We welcome the news that inflation has once again fallen. It is particularly encouraging that this has been driven by falling fuel costs. This is putting extra spending power directly into people’s pockets and is acting as a further catalyst to economic growth.

“Looking to the longer-term, we are encouraged that IoD members are planning pay rises for their staff in 2015. In the majority of cases these will be tied to improved corporate performance. This is the sort of responsible decision which will ensure economic growth is sustainable.”

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