UK falls into deflation in April, first decline in CPI since 1960s says ONS

UK inflation fell 0.1% in the year to April, the first annual fall in the consumer prices index since the 1960s.

Data from the Office for National Statistics said UK core inflation slowed to 0.8% in April, the lowest since 2001, and worse than the market had feared.

However, the month-on-month figure, showing the rise between March and April, saw CPI rise by 0.2%. The market had expected an increase of 0.4%.

The largest downward contribution to the fall in CPI came from transport services, with notably airline tickets and sea fares cut in the period, with the timing of Easter this year a likely factor. In 2014 Easter fell in the middle of April.

The figure is well below the Bank of England’s (BoE) target of 2% but Governor Mark Carney said last week in his Quarterly Inflation Report said inflation was projected to pick up towards the end of the year as the benefits of cheaper fuel boost consumer spending power.

"A temporary period of falling prices should not be mistaken for widespread and persistent deflation," he added.

Economists and analysts largely agreed.

Deflation is likely to last for one month only, said Sam Tombs at Capital Economics. "CPI inflation should return to positive territory in May, as the effect of the shifting timing of Easter ceases to depress it and as the negative contribution from energy and food prices starts to fade."

He also noted that there were still few signs that very low inflation was actually having any malign economic effects, as consumers are spending money and wage growth is picking up.

"Nonetheless, the pound’s recent appreciation and the scope for productivity to recover suggests that it could still be another couple of years before CPI inflation returns to the 2% target. Accordingly, consumers can continue to look forward to healthy increases in their spending power for some time to come," he said.

Although the basket of goods making up CPI prices fell, the ONS also released data that showed house prices, which are not included, rose 9.6% in the year to March. This was up from a 7.4% rise in the year to February.

Brenda Kelly at London Capital Group said traders concerns about interest rate hikes were looking unnecessary.

"Given that a lack of inflation is a recurring theme at this juncture, any speculation over monetary tightening seems massively premature and this is reflected in the toppiness witnessed in global indices. Tomorrow’s Fed minutes are from a meeting which pre-dates the dire April payrolls and the slew of poor macro data, so any hawkishness should be taken with a large pinch of salt."

The ONS said the fall in CPI was the first since official records began in 1996 and the first time since 1960 based on comparable historic estimates.