Key inflation measure hits zero

The Retail Prices Index (RPI), which includes housing costs, fell to 0% in February on an annual basis from 0.1% in January.

But another measure of inflation showed an unexpected rise for the month.

The Consumer Prices Index (CPI), which is used in economic policy, rose from 3% to 3.2%, according to figures from the Office for National Statistics.

There are concerns that if prices keep falling this could lead to a prolonged period of deflation.

The fall in RPI, as recorded in the latest Office for National Statistics data, stems largely from the fall in mortgage repayments after a series of interest rate cuts.

'Volatile'

The increase in CPI has obliged Bank of England head Mervyn King to write to Chancellor Alistair Darling, to explain why inflation is more than one percentage point above the government's own 2% target.

In his letter, Mr King said that despite the increase in CPI inflation last month, "we believe that the sharp decline in CPI inflation since its peak in September is likely to resume in the coming months", with energy prices tipped to fall further.

"It is likely over the next year CPI inflation will move below target, although the profile of inflation could be volatile," he added.

The Bank of England uses the CPI, the index of consumer prices, to set interest rates.

The government, meanwhile, uses the broader measure of RPI, the index of retail prices, to set the level of state pensions, welfare benefits and index-linked government bonds. This is set once a year, based on September's inflation figure.

'Big picture'

While analysts had expected the RPI to fall below zero, it was still the weakest reading since 1960.

"The big picture remains that deflation is on its way," according to Vicky Redwood of Capital Economics.

"After all, at zero in February, the RPI measure was as close to deflation as you can get.

"Falling utility and food price inflation should still push CPI into negative territory before long.

"Indeed, we continue to think that the opening up of a large amount of spare capacity in the economy risks a broader and more persistent period of falling prices."

Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, said: "It is surprising to see CPI inflation increasing when a sharp fall was widely expected.

"The weakness in sterling may be feeding through into higher prices. However, as the economy continues to weaken, Item expects inflation to resume its sharp decline."