Low inflation levels are a risk for the economy

A Warwick professor has warned that the UK’s economic growth is at risk following low levels of inflation.

Dr Dennis Novy, an associate professor of Economics, has voiced concerns that inflation has dropped below one percent for the first time since 2002.

Inflation, as measured by the Consumer Price Index (CPI), fell to 0.5 percent according to official statistics for December 2014. The last time inflation was recorded at such a low level on CPI was May 2000, according to figures from the Office for National Statistics.

Dr Novy suggested that the low levels of inflation could be attributed to falling food prices caused by supermarket rivalries as well as significant decreases in the cost of fuel.

These price decreases remain popular with consumers, particularly students, who will be able to make their money stretch further.

The low level of inflation could cause further problems for the UK’s economy, Dr Novy commented: “The Bank of England is under pressure. With inflation falling, interest rates should normally be reduced. But they have been at rock bottom for nearly six years now and cannot be cut further.”

The professor has warned that low levels of inflation would mean that Mark Carney, the governor of the Bank of England, would need to issue a letter of explanation to George Osbourne. This would be the first letter of its kind.

Dr Novy continued: “There is a risk for the UK economy. Inflation is inching close to the danger zone of outright deflation.

“Once prices stop rising, consumers and businesses delay spending and can pull down the economy. If that happens, it would be time for the Bank of England to have another look at unconventional measures such as quantitative easing.”

Yet the Government remains optimistic about the fall in inflation. Chancellor of the exchequer George Osborne, urged: “Inflation is at its lowest level in modern times. We have family budgets going further and the economic recovery starting to be widely felt.”

The chancellor added: “We will always remain vigilant that we have lower inflation for the right reasons. And today is yet further proof our long term plan is working.”