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UK inflation hits record low, deflation risk grows

Inflation in the U.K. fell to zero in February from a year earlier for the first time since records began in 1989, official data on Tuesday showed. But analysts believe Britain is not in danger of being hit by the growth-sapping deflation that has hamstrung the euro zone and Japan.

Consumer price inflation in the U.K. was pulled down by lower prices for food and motor fuel, falling to 0.0 percent from an annual rate of 0.3 percent in January and compared with analyst expectations in a Reuters' poll for a fall to 0.1 percent.

The British pound slipped to a session low of $1.4917 before recovering to around $1.4937 as the data suggested Britain's economy remains at risk of deflation in the short-term.

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"The U.K. is now within a whisker of deflation," Capital Economics Chief U.K. Economist Vicky Redwood said in a note.

"It looks odds-on that inflation will turn negative in March, when the cut in natural gas prices by British Gas (the utility company with the biggest market share) will show up in the inflation figures for the first time," she added.

Analysts said that while inflation was likely to remain around zero or slightly in negative territory in the months ahead, the U.K. was not at the risk of entrenched deflation that is threatening the euro zone and has sapped growth in Japan for the last decade. This is because strength in the labor market and signs of a pick-up in wages should support consumer spending.

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A long period of falling prices can weigh on consumer spending and damage economic growth as seen in Japan in recent decades.

"The main reason for low inflation is the reversal of the commodity price boom which cannot continue indefinitely," Philip Booth, editorial and programme director at the Institute of Economic Affairs, said in a note following the release of the inflation data.

"Zero inflation is caused by falling oil and food prices and is unalloyed good news. Business costs are stable, people's incomes are going further and standards of living are improving," he added.

Rate outlook

Still, the move in inflation further away from the Bank of England's (BoE) 2 percent target could reinforce expectations that the central bank is more likely to raise interest rates later rather than sooner.

BoE Governor Mark Carney told lawmakers earlier this month that lowering interest rates because of falling oil prices would be "extremely foolish."

"I believe a cut in interest rates looks most unlikely, but with inflation at zero and deflation looming it is almost impossible to see them rising either," said Ben Brettell, a senior economist at Hargreaves Lansdown, in a note.

"It therefore appears interest rates will be stuck at 0.5 percent for some time yet - I don't see them rising until mid-2016 at the very earliest," he added.

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