Inflation hits 1.5% as lockdown bites

The UK’s inflation rate as measured by the Retail Price Index (RPI) fell to 1.5% in March driven by falls in the price of clothing and fuel ahead of the coronavirus lockdown; clothing stores offered discounts as shoppers began staying at home and falling oil prices resulted in cheaper petrol prices

The Consumer Prices Index (CPI) fell from 1.7% in February, according to the Office for National Statistics (ONS).

It’s latest data was collected a week before lockdown started on 23rd March, but ONS’ head of inflation, Mike Hardie, said there were already signs people were spending less in shops and more on necessities such as food.

The agency said the average price of clothes and shoes fell 1.2% in the year to March 2020 as economists warn inflation could slide to 0.5% in 2020 as the economy shrinks.

It also said average petrol prices stood at 119.4 pence per litre during the month – the lowest since February 2019, while diesel stood at 123.8p; the UK benchmark for oil has fallen to about $16 (£13) a barrel as economic activity has slowed, a fall of about 75% since the start of the year.

Sarah Hewin, senior economist at Standard Chartered bank, told the BBC’s Today programme: ‘Normally low inflation would be welcomed as it means people have effectively more to spend in the shop but these are not normal circumstances.

‘The fall in inflation, in addition to low energy prices, is an indication of the steep recession we will see in the coming months.’

‘The fall in inflation, in addition to low energy prices, is an indication of the steep recession we will see in the coming months.’

The BBC quoted Andrew Wishart at Capital Economics as saying: ‘We suspect a larger fall in CPI inflation, from 1.5% to 0.9%, is in store for April as Ofgem [the regulator] lowers the cap on utility bills to reflect past falls in wholesale energy prices.’

He added that falling employment, consumer caution and lower energy prices could pull inflation ‘down to just 0.5% in the second half of this year’.

Bank of England’s target for inflation is 2% and CPI remains well below that; inflation is one of the main factors that the Bank of England’s Monetary Policy Committee (MPC) considers when setting its ‘base rate’ with the knock on effect for savers and borrowers.

Last month the Bank of England moved quickly to cut interest rates from 0.25% to 0.1% in an attempt to support the economy in the face of the coronavirus pandemic; today’s rate is the lowest in the Bank’s 325-year history.

In an effort to lower the cost of borrowing it also said it would increase its holdings of UK government and corporate bonds by £200bn.

However, Melissa Davies, chief economist at Redburn, told the BBC the Bank needs to go further: ‘It will be a volatile ride for inflation over the next year, with negative numbers a possibility followed by a sharp reversal.’

She added: ‘More stimulus is needed, with only limited quantitative easing help from the Bank of England and the Treasury’s lending guarantee scheme falling short. Even the furlough scheme is only delaying an inevitable and large spike in unemployment.’