U.K. on Brink of Falling Prices as Inflation Rate Drops to Zero

Inflation slumped to zero in February, putting Britain on course for its first period of falling consumer prices in more than half a century.

The slowdown from 0.3 percent in January was sharper than economists had forecast and marked the first zero reading since comparable records began in 1989. Based on constructed historical data, it’s the weakest since 1960, the Office for National Statistics said on Tuesday.

The largest downward effect to the annual rate in February came from food and non-alcoholic drinks as well as furniture and household equipment and computer equipment. Food and drink prices plunged a record 3.3 percent. There was a slight downward effect from gasoline prices, which fell to an average 107 pence ($1.60) per liter from 108.3 pence in January.

Bank of England Governor Mark Carney forecasts that the inflation rate will drop below zero in the coming months, though policy makers have said they’ll look through the slump as it’s driven by temporary factors, particularly cheaper oil. Weak price growth means there’s little pressure on the BOE to raise its key interest rate from a record-low 0.5 percent.

“The risks to our inflation calls are firmly on the downside, which raises the risk that the BOE delays rate hikes even further,” said Rob Wood, an economist at Berenberg Bank in London.

MPC Division

The pound remained lower against the dollar after the data was released and was trading at $1.4923 as of 10:45 a.m. London time. It weakened for a third day versus the euro to 73.58 pence per euro. Interest-rate forward contracts are all but ruling out an increase before the middle of next year.

Falling prices are already affecting the euro area, where the European Central Bank has started a quantitative-easing program to prevent a deflationary spiral taking hold. In the U.K., Carney has said the period of falling prices will be temporary and it wouldn’t be right for the BOE to respond.

Nevertheless, BOE Chief Economist Andy Haldane has warned of a risk that low price growth will persist and feed into wages, pointing to a key division on the Monetary Policy Committee as officials debate when to begin raising interest rates.

Economists had forecast that inflation would slow to 0.1 percent in February, based on the median estimate in a Bloomberg survey. From the previous month, prices rose 0.3 percent.

Core inflation slowed to 1.2 percent last month, the lowest since November and below the 1.3 percent forecast by economists. Separately, the ONS said U.K. house-price growth cooled to 8.4 percent in January -- the lowest since March -- from 9.8 percent in December. London home values increased an annual 13 percent.

Input prices at factories fell 13.5 percent in February from a year earlier, reflecting the slump in crude oil. Output prices rose 0.2 percent on the month and were down an annual 1.8 percent.

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