UK inflation rate declines:are we heading for deflation?

Retail Prices Index (RPI) inflation fell in January to 0.1% (the lowest since 1960) from December's 0.9%. This is the change in prices in % terms over the last year, so the rapid fall evident from the blue graph (see BBC News) is in a way even more dramatic as it does not capture the current rate (i.e., December - January) which is presumably quite negative. The RPI includes things like mortgage costs and these have fallen a lot in the last few months. The Consumer Prices Index (CPI) inflation rate (which does not include mortgage costs) only fell slightly, to 3.0% from 3.1%, a smaller fall than expected. The bad news for the readers of this blog is this smaller than expected fall was partly due to an increase in the price of alcohol, but also the falling pound pushing up import prices. Remember that it is really the future expected rate that matters for most things (such as real interest rates) so one can imagine that this is even lower for most people.

See this article in last week's Independent for further discussion of these inflation rate figures and why deflation is so feared. During 1930-33 prices fell at 10% in the US, turning recession into the Great Depression (deflation in the UK was much lower though).