What does deflation mean for stocks?

Deflation isn’t automatically bad for markets, says Cris Sholto Heaton. Rather, it all depends how much prices are falling and why it’s happening.

Last week we learned that the UK is on the verge of deflation for the first time in decades. Prices were flat over the 12 months to February the lowest inflation reading since the current consumer price index (CPI) series began in the 1980s and probably the lowest since the 1960s. Lower energy prices mean that an outright fall in the CPI is likely when the figures for March are published this month.

For those of us who've only ever known a world of inflation, this may sound quite worrying. We tend to associate deflation with periods of economic trouble, such as the Great Depression, when stocks performed very poorly. But deflation isn't automatically bad for markets in fact, it can even be good news.It all depends how much prices are falling and why it's happening.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.