Inflation in the UK could temporarily turn negative in the spring because of falling oil prices, the governor of the Bank of England has said.
Launching the Bank’s inflation report, Mark Carney added that prices were likely to rebound around the turn of the year, so this did not mean the economy had entered deflation.
But he said if low inflation persisted, the Bank could cut rates further.
Inflation stands at 0.5%, the joint lowest level on record.
That is well below the Bank’s target of 2%, and prompted a letter from Mr Carney to Chancellor George Osborne explaining the situation.
In it, he says that “the UK is not experiencing deflation” and that the “most important single reason for below-target inflation over the past year is the unexpected recent sharp drop in energy prices”.
“On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year, ” he writes.
Mr Carney said that the headlines on inflation masked an underlying stronger economy. He has revised up the Bank’s growth and wage forecasts.
For this year and next, the Bank of England sees economic growth of 2.9%. The 2016 prediction is an increase from a previous estimate of 2.6%. Wages are forecast to rise by 3.5% this year, having risen by 1.75% in 2014.