Chancellor George Osborne says the sharp drop in UK inflation should not be feared as he tries to distance the UK from what is happening in the eurozone.
The BBC reports that in a speech later today Osborne will say the UK could experience “a few months of very low or even negative inflation” without significant risk to the economy.
It comes after the news yesterday that the consumer prices index fell from 1 per cent to 0.5 per cent in December, its lowest since May 2000.
In a speech to the Royal Economic Society, Osborne will say the fall is being driven by the collapse in the oil price, and is “much more welcome” than the -0.2 per cent drop in inflation seen in the eurozone.
He will say: “There [in the eurozone] the debate has understandably turned to the dangers of deflation – the risk of a self-reinforcing spiral where economic activity falters, consumers defer purchases as prices fall and nominal debt burdens become ever harder to manage.
“Rising real incomes, a recovery spreading to all parts of our economy, and family budgets that can stretch that little bit further – let’s celebrate these effects of low inflation, not fear them.”
Bank of England governor Mark Carney also told the BBC yesterday the central bank had the tools necessary to deal with the risk of deflation, and to get inflation back to its 2 per cent target.