Inflation is dead, but should rise again before long

For a country that has spent most of its recent history enduring high inflation, the recent release of figures showing that CPI inflation in the UK has now fallen to zero was a watershed moment. What’s more, it looks odds on that March’s figures will show that a period of deflation has now begun. But there are few signs that deflation is on the cusp of turning “bad”. For a start, households’ inflation expectations actually edged up in March and strong retail sales figures show that consumers are undertaking, not deferring, purchases. What’s more, firms have not responded to the drop in inflation by cutting nominal wages. Accordingly, whilst inflation looks set to hover around zero for most of the rest of this year, it should pick back up quite quickly towards the 2% target in 2016 as the temporary factors keeping it down – in particular lower energy prices – abate.