Deflation strikes for the first time since the 1960s

News that we are in a period of deflation for the first time since the 1960s should not cause alarm.

That, at least, is the view of most analysts, who don’t think the fall in prices will last for long.

The consumer prices index fell from 0% to -0.1% during April, but Rain Newton-Smith, director of economics at the CBI, said: “It’s unlikely we will see falling prices for a prolonged period, as the downward pressure on inflation from lower oil prices fades.”

Many pensioners are likely to be amongst those who benefit the most from deflation. Older people tend to spend a greater proportion of their money on things such as food and energy bills, and they could see these continue to fall in price.

Nick Dixon, of Aegon, said: “Pensioners typically have a fixed income and have in recent years seen the value of their money eroded by low interest rates and inflation.

“The news of falling prices means macro-economics are now swinging in their favour as pensioners benefit disproportionately from falling prices.”

There are downsides to deflation, though, too, with interest rates set to remain at historic lows for some time yet.

“The announcement that we have entered a period of deflation is a mixed blessing,” said Vanessa Owen, of LV.

“For retirees who are often hit hardest by rising inflation, falls in energy costs will be welcome. However, many retirees rely on the interest paid on their savings to boost their retirement savings and the prolonged period of low interest rates means many still struggle to make ends meet.”

Unsurprisingly, with inflation in negative territory, every savings account on the market offers a positive return at the moment. However, Charlotte Nelson, of Moneyfacts.co.uk, said savers still needed to shop around to find the best home for their money.

“While the low inflation rate is still being celebrated by those who can see their cash going further, savers looking to supplement their income are struggling with not only a lack of choice but abysmal savings rates,” she said.

“The withdrawal of the NS&I Pensioner Bonds sees the only decent rates removed from the market. We knew they weren’t going to be around forever, but there is little else left for savers who are wrestling to get good deal.

“A staggering 138 savings accounts on the market pay 0.5% or less, but consumers can easily get over twice this amount on a best-buy easy-access account.”

Despite the relaxed attitude of most observers, there were some words of doom when the deflation news was announced.

David Lamb, of foreign-exchange firm Fexco, said: “”The D-word has finally become a reality. While last week’s downbeat inflation report from the Bank of England had prepared the markets for the worst, the confirmation that the UK has slipped into deflation has arrived like a bucket of cold water on to sterling.

“The pound fell sharply against the dollar on the news. With the prospect of interest-rate rises slowly disappearing over the horizon, investor appetite for sterling is evaporating fast.

“With international investors increasingly rattled by the prospect of Britain’s EU referendum, sterling’s post-election highs are likely to be short-lived.”