Fall in oil price may trigger UK deflation

The recent slump in the price of oil could help boost the UK economy, but too much of a further fall could reverse the good done, said a study backed by accountancy firm Ernst & Young.

The value of oil has tumbled in recent months. It fell below $40 a barrel last week, after peaking at almost $150 a barrel last year.

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The fall, if oil stabilises around $40 a barrel, would cause an 0.3 per cent reduction in economic contraction this year and add 0.6 per cent to economic growth in 2010, the survey, conducted by the Ernst & Young Item Club, said.

However an excessive additional fall could lead to deflation, the research cautioned. "It is very possible that a further fall in the international oil price will spark deflation that will further damage a global economy that is already stumbling into 2009," said Hetal Mehta, senior economist at the Ernst & Young Item Club.

Falling oil prices will also chip away at the UK tax revenue generated by North Sea oil reserves, Ernst & Young added.