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IPPR warns we could face 3 per cent RPI deflation by Autumn

The Institute of Public Policy Research has warned we could see 3 per cent deflation by the Autumn on the retail price index measure.

The Office for National Statistics announced today that inflation on the consumer prices measure was 3.2 per cent in February, while inflation calculated using the all items retail prices index fell to zero.

IPPR senior economist Tony Dolphin says that with the retail prices measure of inflation falling to zero in February, the UK narrowly avoided its first experience of deflation since March 1960.

He says: “Inflation was widely expected to fall below zero in February but was prevented from doing so by bigger than expected increases across a range of goods, including furniture, clothing, recreational goods and footwear.

“This probably reflects higher import prices – the result, in part, of sterling’s decline over the last 12 months.

“The same factors were also behind the rise in inflation on the consumer prices measure.”

Dolphin warns that deflation on the retail prices measure has probably only been delayed by a month.

He says: “The main factor dragging it down is lower mortgage interest payments, which fell by 39.9 per cent over the year to February.

“These will record an even bigger fall over the year to March, following February’s cut in the Bank of England base rate.

“By autumn, inflation could be as low as -3 per cent as a result of the recession, lower fuel prices and falling mortgage payments.”

But he says this is not a general deflation.

He adds: “Prices are falling in sectors where they have been falling for a number of years – such as clothing and electrical goods – and in areas where households are unable to postpone purchases – like energy supply.

“The biggest cause of deflation is falling mortgage interest rates, which have probably now reached their lower limit.”

Dolphin argues that the -3 per cent inflation rate should be ignored when setting wage agreements and by the Government when deciding the indexation of pensions and other benefits in order to limit the implications for the economy.

He says: “The biggest worry of deflation in the economy right now remains falling house prices, which, through lower confidence may be holding back consumer spending.”

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