Deflation fears were increased today after the underlying inflation rate fell to its lowest recorded level, bringing fears that debt problems may take longer to clear.
According to data from the Office for National Statistics (ONS), inflation as measured by the consumer price index (CPI) fell by 0.4 per cent to 1.8 per cent in June – down from 2.2 per cent in May.
The broader measure of inflation, the Retail Prices Index (RPI), recorded the steepest drop in living costs in over 50 years. Prices were 1.6% down in June 2009 from June 2008.
This means that the Retail Prices Index has now been in negative territory for four consecutive months, and is at its lowest rate since the ONS began keeping records in 1948.
The Government’s target level of inflation was at 2%, so today’s reported fall marks the first dip under this in almost two years.
David Kern, of the British Chambers of Commerce, said: ‘The figures confirm our assessment that in the short-term, the main policy priority must be countering the risks posed by recession and deflation.
“Inflation is a longer-term threat which must be dealt with by a credible exit strategy, but this can only be applied when the recession ends.”
Ivan Cooper, Chairman at leading debt management firm Chiltern, said: “With people increasingly reluctant to spend their money, more and more jobs will be lost – which will only add to the debt problems of those affected.
“The whole country could benefit from some debt advice if we do fall into a deflationary period, as companies will have to cut prices to stimulate demand. If people withhold their money thinking it’ll be much cheaper next week, then even cheaper the week after that, no-one will spend anything and companies will have to cut more jobs to keep overheads down. It’s a self-perpetuating downward cycle that’s best avoided.”
CPI is a measure of the average prices of a basket of typical consumer goods and services used by households. House prices are excluded from the calculations, so unlike the RPI it does not reflect the decline in property prices – reported at approx 20 per cent since their peak.