Fund managers and economists are remarkably sanguine about the development, with nobody seemingly pushing the panic button or forecasting a destructive spiral as can be the case with deflation.
The underlying fundamentals for the UK economy are good and the price drop has more to do with exceptional events such as the oil price slide and the ramping up of supermarket wars than a malaise among consumers.
“The market expects that deflation will be short lived in the UK,” said Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond Fund. “By the end of 2015, on the assumption of oil’s stabilising here or hereabouts, CPI will be 0.8% to 1% higher than today’s numbers, as the negative drag of oil’s decline will fall out of the year over year comparisons,” he added. “Also noteworthy is that with RPI in April registering a gain of 0.9% year over year, the ‘wedge’ – the extent of the difference between RPI and CPI – has increased to 1%, which is slightly higher than the long-term average.”
“UK inflation has been low and falling for some time, largely due to the fall in global oil prices pushing fuel and energy bills lower,” said Azad Zangana, senior European economist at Schroders. Global agricultural prices have also been falling, helping to lower food price inflation.”
“Overall, we are not concerned by a single negative reading. Lower inflation is helping to boost the spending power of households, raising demand in the economy, which should raise inflation rates in time,” Zangana added. “In any case, we expect the UK to see higher inflation as we progress through the year and the impact from lower energy prices falls out of the annual comparison.”
“I very much expect to see an acceleration of GDP in the second half of the year, and actually investors should be focusing on the twin spectre of rising growth and inflation,” said GLG UK Income fund manager Henry Dixon.
“I am always concerned when something has been written off, and inflation is definitely in that camp currently,” Dixon added. “In my view, when some of the short-term factors such as the fall in the oil price come out of the equation, it could overshoot the official target and climb back up near to 3% by January.”
