Ben Ridgeway Ben Ridgeway
Sales Trader, Client Trading Services, Saxo Capital Markets
21 May 2015

Where did all the inflation go?

UK inflation levels turned negative in April for the first time on record, falling to -0.1%. Here we explore what factors have deflated prices – and what this means for the future of the UK economy.

​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​Decoding the BoE report

Concerns that quantitative easing would almost certainly trigger stagflation (low productivity and high inflation) seem to have been comically misplaced. CPI inflation has tumbled from almost 5% in 2011 to its current position of near-zero by end of Q3 2015.

In its latest report, the Bank of England's forecast shows inflation almost unchanged: rising to nearly 1% next year and reaching the target 2% level in 2017.

Low inflation and meagre economic growth – of 0.7% for Q2 2015 and Bank of England forecasting 2.3% for the entire year – appears contradictory as wage growth surpasses 2.5% and unemployment for the first half of 2015 hit a seven-year low​.

However, Bank of England governor Mark Carney warned t​hat productivity, the main impetus behind higher wages, remained weak; in fact, he forecast productivity to plateau until next year.

Where did the inflation go?

There are two prime candidates for letting the inflation out of the British economy:

  • Plummeting oil price

Oil prices tanked last year, not least due to the US's shale gas revolution meaning the US is importing less, producing a glut in world oil markets, which reduces the price.

British consumers may be feeling flusher at the petrol station, but not by enough to inspire large purchases like consumer electronics, cars, houses or white goods, but coffee shops and the high street will have benefited.​

But this is only part of the story: UK core inflation – excluding food and energy – has continued to tumble and stands at 1​%, hitting a nine-year low in Q2 2015. ​

Perhaps surprisingly, markets have discounted the potential for deflation. Instead the perceived wisdom is that as wage inflation increases, more people are in work and business confidence increases so consumers will loosen the purse strings to purchase those bigger items, boosting​ economic growth.

  • Slowing global demand

This is more worrisome and complex, the reasons for slowing global demand contested. Pre-crisis demand levels can be said to have been fuelled by unsustainable public and private leveraging, while others argue that slowing global demand is a result of a complex rebalancing of the global economy, or a combination of demographic changed, post-internet productivity declines and unduly low investment levels.

Only last month, UK chancellor George Osborne said "We aren't exporting enough" – and this won't be assisted by strong Sterling!

Future outlook?

Interest rate hikes are not the only weapon in the central bank's arsenal; QE could be restarted, as it has been in ​other advanced economies – though such action is looking dangerously like a return to a 'new normal' rather than the 'emergency measures' of old. That means less fire power were an unforeseen emergency to strike. In markets, the perceived wisdom so quickly becomes the folly of crowds.​


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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.