Falling inflation will be boon for UK consumers

A RARE fall in the cost of living in Britain is forecast for the first quarter of 2015 – but any talk of deflation is overdone, according to an influential think tank.

Inflation is expected to fall in the first half of the yearGETTY

Inflation is expected to fall in the first half of the year

In fact, the UK economy should expand even faster as the oil price collapse boosts consumer spending power and stays the hand of the ratesetters at the Bank of England, the EY Item Club's winter forecast said today.

However, Prof Peter Spencer, chief economic adviser to the Item Club, said there are risks to be aware of.

He said: "The global economy has slowed in recent months and question marks remain over the eurozone, reinforced by worries over the Greek election.

"Falling oil prices provide a nice offset to the weakness of exports, but will extend our dependence upon the home market and leave the economy seriously unbalanced."

Inflation is now expected to fall in the first half of the year and average around zero for 2015 as a whole.

However, Spencer emphasised that this does not constitute deflation.

Falling oil prices provide a nice offset to the weakness of exports, but will extend our dependence upon the home market and leave the economy seriously unbalanced

Professor Peter Spencer, chief economic advisor to the Item Club

For that to be the case, there would need to be a prolonged drop in prices, which he believes is unlikely. As a result of lower inflation, Britons will see actual income grow by 3.7 per cent this year.

His comments come as some observers are drawing comparisons to the highly damaging deflation seen in the 1930s. One of the differences between now and then, however, is that Britain's GDP is growing at quite a respectable pace.

As research from the Bank of England has previously pointed out, if policy makers act quickly and decisively any tendancy towards deflation should be short–lived.

EY has raised its estimate for UK GDP growth from 2.4 per cent to 2.9 per cent in 2015, up from 2.6 per cent last year.

Asked if Bank Governor Mark Carney had done enough to avoid falling prices, Spencer said he believed there was "not an awful lot more he can do" – though he could perhaps engineer an extra half point cut in interest rates.

But it would not be appropriate or necessary to do more than that, he concluded.

The most recent forecasts from the World Bank, released last Tuesday, back up the Item Club's view of the situation.

In its latest Global Economics Prospects report, the Washington–based lender highlighted how activity in the US and UK was gathering momentum, as labour markets heal and monetary policy remains very accommodating.

That stands in stark contrast to the euro area and Japan, where the legacies of the financial crisis continue to linger.

On the other hand, the World Bank said that the continuing slowdown in China was being carefully managed, adding that growth there should still come in at a robust 7.1 per cent over the course of this year.

Would you like to receive news notifications from Daily Express?