Inflation drop takes UK further towards deflation

Inflation has dropped below 2% for the first time since 2007, new figures have shown.

The Consumer Prices Index (CPI) has fallen to an annual rate of 1.8% in June – down from 2.2% in May, the statistics released by the Office for National Statistics (ONS) this morning indicated.

As well as the CPI, the Retail Prices Index (RPI), which includes mortgage interest payments and housing costs, has also fallen – from 1.1% in May to -1.6%.

The Bank of England, which controls the UK’s base interest rate, tries to keep the rate of inflation at 2% so prices – and the economy – stay stable.

And while Bank of England governor Mervyn King, who is tasked with writing an explanatory letter to the Chancellor each time the rate of inflation climbs above 2%, can rest his writing hand for the first time this month, other experts are voicing concerns that the economy might be swinging in the opposite direction and heading towards deflation.

“This sharp fall is hardly a surprise,” wrote BBC economics correspondent Nils Blythe. “In many ways the bigger surprise is that the CPI has taken so long to fall below the official target rate of 2%.”

The British Chambers of Commerce’s chief economist David Kern was a little sterner. “The RPI has moved further into deflationary territory,” he said. “The figures confirm [our] assessment that in the short-term the main policy priority must be countering the risks posed by recession and deflation.”

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