UK experiences negative inflation, but for one month only

Tuesday's inflation figures look set to show that the UK slipped into deflation in April. But this is likely to have largely reflected the timing of Easter this year compared to last. Since the oil price has rebounded and wage growth is building, a damaging, long-lasting period of deflation remains unlikely. 

After remaining at zero in March, CPI inflation probably nudged down to -0.1% in April. Granted, petrol prices rose by nearly 2% in April, a rise that will add about 0.1 percentage points (pp) to the headline CPI inflation rate. And surveys suggest that the pace of food price falls might have eased. 

However, the ONS estimates that the changes to alcohol, tobacco and other duties that took effect in April will have subtracted 0.08pp from the headline inflation rate. The earlier timing of Easter (Sunday) this year (5th) compared to last (20th) is also likely to have depressed inflation. The ONS records prices in the middle of the month, and prices for some items are higher over Easter. As a result, a 'normal' level of prices in April 2015 will be compared to an Easter-boosted level in April 2014. This effect could be pronounced for airfares, whose contribution to inflation is expected to be dip by 0.1pp.

Nonetheless, deflation is likely to be for one month only. The recent rebound in oil prices and stability of global food prices indicates that the negative contribution to inflation from energy and food prices will fade over the coming months. Meanwhile, there are no signs that deflation is spreading to the services sector. Indeed, the pick-up in the headline (three-month average of the annual) rate of average earnings growth from 1.9% to 2.2% in March - its strongest level since June 2011 - is likely to push up services inflation since it has not been accompanied by rising productivity.

Granted, it is too soon to conclude outright that the threat of prolonged period of near-zero inflation has passed. The YouGov/Citi measure of households' inflation expectations fell back in April. And a further rise in sterling would keep inflation very low for longer. But Capital Economics says "with the UK's low unemployment rate likely to support a further pick-up in pay growth and few signs that deflation is spreading from goods to services, the chances are that CPI inflation will return to about 1.5% early next year".