Deflation hits UK for first time in generationsDrop likely to have negative impact on pay deals

21 April 2009

Inflation at minus 0.4%

Deflation could impact on private sector pay deals

The UK experienced its first period of deflation in almost 50 years in March, official figures have revealed.

Data from the Office for National Statistics (ONS) showed the retail prices index (RPI) measure of inflation fell to minus 0.4% last month, down from 0% in February, the first negative reading since March 1960.

Wage deals likely to be hit

The official consumer price index (CPI) measure also fell, from 3.2% in February to 2.9%.

Today's inflation figures were broadly in line with expectations and will reignite fears of a period of deflation for the UK as the effects of recession take hold of the economy.

While CPI remains above the government's 2% target, negative RPI could have negative consequences for many households because it is used as a benchmark for private sector wage settlements.

It is also used as the basis for annual rises in state pension payments and other benefits, as well as annuity payments for private pensions and rates for index-linked savings.

Interest rate cuts blamed

RPI was pushed lower than the official measure because, unlike CPI, it includes housing costs and mortgage payments.

Its fall was attributed to the effects of deep interest rate cuts, which filtered through to lower mortgage payments and falling house prices.

Last month's fall reflects February's cut in the cost of borrowing to 1%.

The Bank of England has since slashed interest rates further, to a record low of 0.5%.

Lower prices hit inflation

The ONS said the largest downward pressure on CPI was a drop in household gas bills.

Food and non-alcoholic beverage costs were also lower, as fruit, vegetables and bread prices all fell compared with a year ago.

Transport costs also played a part in pulling inflation down, mainly because of lower air fares on European routes compared with last March. 

The ONS said this was because the Easter school holidays - which tend to attract higher flight prices - were in March last year, but April this year.

Fuel also rose more slowly than a year ago, when it had just begun to climb to the peaks experienced last summer.

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