Capital Economics predicts further CPI falls

The UK is still at risk of falling into deflation, despite the latest Consumer Price Index (CPI) results.

This is the view of a Capital Economics expert, who delivered her comments in the wake of new official inflation figures.

According to the July data, annual price rises have held steady, with CPI staying at 1.8 per cent for the month.

Analysts had previously predicted that the effects of the recession would drag asset prices down - meaning that Britain could be dragged towards a prolonged period of negative CPI.

This ’deflation’ in turn has the potential to lengthen the recession.

Vicky Redwood, UK economist at Capital Economics, said that these events could still be on the cards for the UK.

’I think the underlying trend is down,’ she said.

’That there is a large amount of spare capacity, or slack, in the economy continues to weigh down on price pressures. Overall, inflation will fall much further.’

Deflation conditions would have negative effects for private banking services customers who already hold large debts, such as a big amount outstanding on a mortgage loan.

This is due to the phenomenon of ’debt deflation’, where money owed when prices were higher becomes harder and harder to repay as prices fall.

In its Inflation Report released earlier this month, the Bank of England predicted that CPI would fall to one per cent later in the year.ADNFCR-2318-ID-19320213-ADNFCR