Retail prices index slips to lowest ever level

The retail prices index (RPI) suffered a record drop in April, falling deep into minus territory at -1.2 per cent, down from -0.4 per cent in March. The figure is the lowest since records began in 1948 and was influenced most by the drop in energy costs and mortgage repayments.

Analysts, who were surprised by the severity of the decline, now expect the level to fall as low as minus three per cent as deflation takes a hold on the British economy. The drop has further significance for the UK as it is used as the benchmark for pay agreements and other index-linked deals, meaning pain for many workers and pensioners, whose salaries and annuities will be affected.

The consumer prices index (CPI)number also announced was still some way into positive territory, registering an annual gain of 2.3 per cent in April. This measure does not include mortgage costs, but is still at its lowest level for a year and many observers expect it to go negative eventually too.

The Bank of England expects it to remain below its inflation target of two per cent for up to three years. Although initially a benefit for consumers, as prices of the goods they buy drop, eventually it is a drag overall as buyers put off purchases and the economy stagnates, leading to more job cuts.

A number of companies have already announced pay freezes or reductions and in the wake of the new inflation data unions voiced concerns over further cuts.

WHAT THEY ARE SAYING
John Philpott, chief economist at the Chartered Institute for Personnel and Development, in the Guardian: "With 8 in 10 employers using RPI inflation as a cost of living benchmark when setting pay, and unemployment rising faster than at any time for a generation, the ongoing squeeze on pay is set to continue, particularly in the private sector. It is now almost certain that growth in average earnings will moderate to an annual rate of 2% or less by the end of the year."

Liam Halligan, Daily Telegraph: "Most of the financial markets, and the population as a whole, know deflation is nonsense. Price pressures remain high. More than that, concern is growing that our policy response to 'sub-prime' - cranking-up the Bank's printing presses and drowning ourselves in more debt, and all against a backdrop of negative real interest rates - is itself storing up high inflation." ·