UK inflation sinks to 0% for first time

Annual inflation in the UK fell to 0% in February for the first time, as lower energy and food costs continue to depress prices.

The UK's consumer price index (CPI), which measures the rate of inflation, did not grow between February 2014 and February 2015, placing inflation at 0%. This is down from 0.3% in January and below analyst forecasts for a fall to 0.1%.

This is the first time CPI has been at 0% since the index was created in 1997.

Commenting on the fall, Adrian Lowcock, head of investing at Axa Wealth, says: "We expect inflation to remain close to zero for some time, possibly turning negative. However the effect of fall in petrol and food prices remains positive and provides a boost to household incomes and subsequently consumer spending."

Key drivers

The falling cost of transport and food were the key drivers behind the decline, as food prices fell by 3.4% and the cost of motor fuels fell by 16.6% in the year to February 2015. In total, food and motor fuels dragged the annual CPI rate down by 0.9%.

The dramatic decline in the price of oil - which is 47% lower, at $56.32 for a barrel of Brent crude, compared to a year ago - as well as a continuing price war between the UK's supermarkets are largely to blame.

The cost of recreation and culture as well as furniture and household goods also fell over the past year, reducing the annual CPI rate by 0.08% and 0.13% respectively.

Stripping out the effect of food and energy costs, core inflation grew by 1.2% between February 2014 and February 2015, down from 1.4% in January and also below analysts' forecasts for a fall to 1.3%.

Warning of the threat of deflation in the UK, Maike Currie, associate investment director at Fidelity Personal Investing, says: "This fall comes less than two weeks after Bank of England governor Mark Carney warned UK households could face a 'clear and present danger' if the current low levels of inflation fell to the kind of spiralling prices hind the Great Depression of the 1930s.

"Deflation is dangerous because it causes companies and consumers to do the exact thing that causes more deflation - delay spending in the hope of further price falls in future. With inflation now at zero, the UK is now just one shock away from deflation."

Calum Bennie, savings expert at Scottish Friendly, adds that the decline in inflation would be bad news for cash savers. "Barring a sizeable shock, the writing is on the wall that the economy will be in deflation within a couple of months. If this is the case, the Bank of England may find itself under increasing pressure to cut interest rates from its all-time low of 0.5%.

"This is great news for borrowers, but places further pressure on cash savers across the country. The outlook for savers is not good and those looking to build up deposits will have to scurry around to get decent rates on cash accounts. Alternatively, for a long-term investment, now could be the time for people to consider stocks and shares, or investment ISAs," says Bennie.

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