Deflation: enjoy it while it lasts

published 21 May 2015

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.

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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".

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.