Inflation set to hit MINUS 0.3% in danger sign for pensions

Inflation set to hit MINUS 0.3% this month in danger sign for pensions

Inflation is expected to turn negative this month in defiance of huge amounts of money creation by the Bank of England and colossal financial support for the economy from the Treasury. 

While Wednesday’s annual figure for the Consumer Prices Index in July is thought likely by City analysts to remain at 0.6 per cent, the Bank expects the year to August to show a 0.3 per cent drop, meaning prices are falling rather than rising. The forecast figure for the 12 months to July is remarkably low by historical standards. At the height of inflation – in the mid-Seventies – prices were rocketing by 40 times that amount. 

A minus figure for August could herald a near-zero annual rate in September, which would be bad news for those who have retired as increases in many private pensions are linked to inflation in that month. But it would be welcomed by those paying business rates as they are also tied to the September CPI. 

Change of direction: Inflation is expected to turn negative this month due to the coronavirus pandemic

The traditional Retail Prices Index, which was the UK’s official inflation measure until 2003, remains the benchmark for train fares and some private pensions. RPI in June was 1.1 per cent. Were the rate to drop in line with CPI expectations, it would fall to 0.2 per cent for August. 

In its quarterly Monetary Policy Report this month, the Bank wrote: ‘Inflation is expected to turn briefly negative in the near term, falling to minus 0.3 per cent in August. 

‘Lower energy prices are expected to continue to weigh on inflation and the cut to VAT on restaurant dining, accommodation and attractions will act as an additional drag.’ 

Despite this, a fall in inflation had not been expected given the huge economic stimulus applied since the Government imposed lockdown and the hoped-for economic boost from easing of the restrictions. 

Quantitative easing by the Bank of England – the creation of new money with which to buy assets, thus pumping cash into the system – has been stepped up from the figure of £435billion in response to the 2008-9 financial crisis. An extra £310billion has been added since March due to the pandemic, taking the total to £745billion. At the same time, the Treasury has been spending heavily on business support schemes and furlough payments. The vast cost of this in terms of the public finances will be underlined by Friday’s figures. 

The independent watchdog, the Office for Budget Responsibility, expects borrowing of £28.6billion in July, following £35.5billion in June, £45.5billion in May and £46.9billion in April, at the height of the crisis. August is forecast to see a spike in borrowing to £38.3billion, after which the OBR expects a gradual decline, as expensive measures such as the Coronavirus Job Retention Scheme come to an end after October, with borrowing down to £19.1billion in December. 

The Bank expects inflation in the 12 months to the third quarter of this year to be 0.3 per cent and to the fourth quarter to be 0.2 per cent. Meanwhile, it emerged that the lockdown has created a new way of measuring inflation. 

Wednesday will see a version of the Consumer Prices Index adjusted to remove items that were not available during the period of the most severe restrictions. 

The Office for National Statistics said that for June, while CPI was running at an annual 0.6 per cent, the ‘experimental’ series adjusted for the coronavirus would have been 0.5 per cent. 

Differences between the official and new series take into account factors including the impact of the pandemic on international travel.