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UK sniffs global deflation danger

Tuesday, January 13, 2015 - 02:27

UK inflation plunges to its lowest level since May 2000 and could be set for more falls. As low-to-no price pressures increasingly become a global phenomenon, should Britain brace for the same battle the euro zone's fighting - against deflation? David Pollard reports.

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If this gargoyle outside the Bank of England looks shocked, it's no shock he's shocked. Because UK inflation is on the way down faster than anyone expected. Latest figures show it at half a per cent last month - exactly half what it was the month before. It's a surprise for forex traders too - they sold sterling to an 18-month low against the dollar after the numbers. And unwanted news for the Bank's chief Mark Carney. With even softer prices still seen ahead, he now has to fulfil a traditional duty - to explain Bank policy to the UK finance minister. SOUNDBITE (English) GEORGE OSBORNE, UK FINANCE MINISTER, SAYING: ''It's likely to drift a little lower, yes, in subsequent months, and so I have to write a letter to the Chancellor, as you alluded, next month and I'll probably have to write at least more after that.'' But could the UK be close to joining a not-so-exclusive club? Of those countries struggling with deflation - and for the wrong reasons, principally low demand. Falling oil prices are dragging down consumer prices around the world. But for Japan, that's been compounded by decades of low growth. The euro zone's recent negative inflation numbers have some asking whether it's heading the same way. Darren Sinden of Admiral Markets. (SOUNDBITE) (English) DARREN SINDEN, MARKET COMMENTATOR, ADMIRAL MARKETS, SAYING: ''If we look at Japan, which has basically been the monetary-policy lab for the last 15, 20 years, they've been dipping in and out of a deflationary environment with almost permanent QE and government stimulus, and they've still not been able to banish it. If it sets in, it's quite a frightening scenario.'' Frightening maybe, but perhaps not yet. Consumers and businesses in Europe aren't quite at the point of stopping spending - that's the nightmare scenario. Low prices could help sow the seeds of a recovery. According to Berenberg's euro zone economist, Christian Schulz. (SOUNDBITE) (English) CHRISTIAN SCHULZ, SENIOR ECONOMIST, BERENBERG, SAYING: ''If inflation stays lower than the euro zone average and in particular lower than Germany for a long period of time, that means these economies are becoming more competitive, it's becoming more attractive for companies to invest because wage costs are lower generally, input costs are lower than they are in Germany and that makes them over time more competitive and is thus the basis for future growth.'' Scary or not, the ECB is likely to add further stimulus over the coming months. The only shock there could be if, after all the talk of QE, it chose not to.

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UK sniffs global deflation danger

Tuesday, January 13, 2015 - 02:27