British economy falls into deflation, first since 1960

April 22nd, 2009 - 12:21 am ICT by IANS  

London, April 21 (IANS) The British economy has entered deflation for the first time in almost half a century, heralding a fall in wages and freeze in pensions, a media report said Tuesday.
The Retail Prices Index (RPI) measure of inflation fell to -0.4 percent in March, indicating that prices paid by consumers last month were lower than a year ago - a trend not seen since March 1960, The Telegraph reported.

The figure, published by the Office for National Statistics Tuesday, was roughly in line with economists’ predictions of a fall to -0.5 percent.

RPI inflation, which includes housing and mortgage costs, has been driven down by the the series of aggressive interest rate cuts from the Bank of England which have triggered lower variable rate mortgage repayments, the newspaper said.

Economists were wrong footed last month when RPI, widely expected to go negative, fell by far less than expected, moving from 0.1 percent to zero.

Because RPI is used by most trade unions and large companies to set wage increases, experts believe many workers will suffer from pay freezes this year, with some experiencing pay cuts.

The official figures show that wages are increasing by a mere 1.8 percent year-on-year - the lowest since records started a decade ago - and economists now believe that this could fall to just 0.5 percent later this year.

Ben Read, an economist at the think tank Centre for Economic and Business Research, said: “Employers are going to be stripping back all elements of pay. For the majority of the population it will feel like a pay cut in real terms. This year some households will be earning significantly less than last year.”

Pensioners will be hit too because the state pension is set using the level of RPI in September of the preceding year.

The economy is expected to remain in deflationary territory for many months, which will mean pensioners will receive the lowest possible increase of 2.5 percent next year, adding just 2.40 pounds (about $3) to the full weekly pension, an amount criticised as “derisory and pathetic” by campaigners.

The Consumer Prices Index, which does not include the cost of housing fell to 2.9 percent in March from 3.2 percent in February. The February figure represented a surprise rise from three percent, after the weak pound pushed up the cost of imported food, the report said.

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