Inflation, Deflation... Where next

First it was oil, now it’s the goods we buy on the High Street. It’s funny. While all around doom and gloom is the staple diet, the best bit of economic good news we have received for a very long time has barely been noticed. The latest data out from the British Retail Consortium (BRC) revealed that both food and non-food inflation turned negative in October.

The annual figures are still well into positive territory, of course, with the BRC recording the annual rate of food inflation at 7.5 per cent. Non-food annual inflation stands at 0.7 per cent and the combined rate at 3 per cent. But you need to bear in mind, 12 months’ worth of data make up the annual figures and, therefore, it takes a year before changes work their way out of the system.

Annual food price inflation peaked in August, hitting 10 per cent, whereas month on month food inflation peaked in the previous month when prices rose by 1.9 per cent in just the one month. But ever since then, the trend has been down. Food inflation rose by just 0.3 per cent in August and turned negative in September. But October was the first month which saw negative month on month food and non-food inflation for a very long time. Overall, prices were down 0.1 per cent in the month, the first fall this year. But, expect the decline to accelerate. We could be just six months or so away from seeing the annual rate of food and non-food inflation go negative.

That the next year or so is going to be tough, is patently obvious. But for those who can hold on to their jobs, affordability is set to improve significantly. Every penny will stretch a lot further.
Falling food and oil prices will also afford the Bank of England greater leeway in cutting interest rates – of course. By the time you read this, you will probably know how much the Bank of England has chosen to cut interest rates.

The time is now right to cut rates in a big way. The UK’s central bank could easily justify knocking 1.5 percentage points off interest rates. It probably won’t, a half a per cent is far more likely, given the bank’s usual cautious approach. In any case, the full extent of rate cuts won’t be passed on by the banks. But the trend is clear. Interest rates, and in turn the monthly amounts mortgage holders have to fork out for their payments, are all set to fall.