The halving of the oil price since the summer has already tipped the euro-zone into deflation and looks set to turn the headline inflation rate in the US and Japan negative shortly too. We still think that the UK will just about avoid deflation, although it looks set to be a close run thing.
But regardless of whether or not the headline CPI inflation measure turns negative or not, the bigger picture is that weak price pressures are a net positive for the UK economy. Indeed, the fall in the oil price should provide a significant boost to households’ discretionary spending power. And the risk that low inflation becomes ingrained looks small. So rather than being a risk to the recovery, low inflation is another reason to think that GDP growth will be strong again this year.
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