This morning Britain’s Office for National Statistics reported that inflation had dropped to 0%. This is the lowest rate Britain’s seen since 1933. Cheap energy costs and a food price battle between British supermarket chains were the chief causes for the CPI deflation. Projections show the pound going into deflation in the coming months.
Deflation poses a risk to the economy. It is an interest rate story; deflation makes today’s consumption look more expensive relative to some time in the future and consumers postpone purchases. Also if inflation is low, rates can’t fall far enough to help boost the economy.