Deflation: enjoy it while it lasts

Prices in Britain are falling for the first time in over half a century, so make the most of it.

743-shopping-634
UK consumers have more in their pockets

Prices in Britain are falling for the first time in over half a century. The annual rate of consumer price inflation (CPI) was -0.1% in April. It's the first time we have seen deflation on this measure (or comparable figures) since 1960, according to the Office for National Statistics.

The Retail Price Index, (RPI), which, unlike CPI, reflects housing costs, is still positive at 0.9%. Core inflation (CPI minus volatile food and energy prices) has fallen to 0.8%, a 14-year low.

What the commentators said

While inflation nibbles away at a fixed sum of debt, deflation increases the real burden. This makes consumers nervous and less willing to spend, so companies put investment plans on hold as they can't push through price rises. Falling demand pushes prices and wages lower, further undermining demand in a vicious circle.

Fortunately, this phase of deflation should prove "an interesting piece of trivia" rather than a danger sign, said Martin Beck of the EY Item Club. Rather than reflecting a slump in demand, "the big picture is still one of a drag from past falls in energy and commodity prices", said Richard Barley in The Wall Street Journal.

Petrol prices are down by over a tenth in the past year; food, due to an ongoing price war in the supermarket sector, is 3% cheaper. A strong pound has tempered import prices, and in April, the timing of Easter affected airfares: they were down 5.3% year-on-year, compared to up 6.8% in March.

So we are seeing "external and seasonal factors drag down prices", rather than low overall spending, said economist.com. And this may be over quickly. Oil prices are rising again and the major fall of 2014 will soon drop out of the annual comparison. On a monthly basis, prices bottomed out in January and have climbed since. Also there is scant sign of weak demand.

In fact, Britain's consumers are enjoying an extra boost to their spending power, as deflation makes their rising pay packets more valuable. Private-sector pay is rising at an annual rate of 3.3%, the fastest since the credit crisis, as Barley noted. So there seems little cause for alarm over deflation we should, concluded Scotiabank's Alan Clarke, "enjoy it while it lasts".

Recommended

Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Spare us these desperate measures
UK Economy

Spare us these desperate measures

Struggling firms are trying to reinvent themselves. Some are going to have to get much more radical
21 Sep 2020
Universal Credit comes good
UK Economy

Universal Credit comes good

The government’s benefit reforms have been plagued with disasters since their introduction in 2013. The Covid-19 crisis, however, has revealed a posit…
21 Sep 2020
Bad data is driving fear of a second wave of Covid-19
UK Economy

Bad data is driving fear of a second wave of Covid-19

The recent spike in Covid-19 “cases” is very different to the original outbreak, says James Ferguson of MacroStrategy Partnership. The government need…
18 Sep 2020

Most Popular

Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020