Cover of MoneyWeek magazine issue no 684

Osborne's sleight of hand

28 March 2014 / Issue 684

What to do with your pension now?

PLUS:

  • Beware – inflation is on the way
  • The best London-listed bank to buy now
  • What do the annuity changes mean for you?

Excerpt

Merryn Somerset WebbEDITOR'S LETTER

Merryn Somerset Webb

The deflation myth

I expect you’re worried about deflation by now. If you aren’t, most economists and politicians will say you should be. Look, they say, at the failure of all the prices around you to rise as central bankers think they should.

The Consumer Price Index (CPI) in the UK is supposed to be rising at 2% a year. But last month the prices it measures only rose 1.7%. In the US, inflation is a mere 1.1%. Worst of all, in Europe prices are refusing even to rise at an average rate of 1%.

Look at those numbers, say our monetary leaders, and you will see why interest rates are so low: they must stay lower for longer to stop the economic nightmare that is deflation getting out of hand.

But there’s a problem with all this. First, it isn’t clear that flattish prices are a bad thing. Japan’s GDP per person has grown perfectly well all the way through its periods of stable prices and even deflation over the last 20 years. And second, it isn’t remotely clear that deflation is anything to worry about.

Think about it for a minute. If we live in deflationary times, why is the next election gearing up to be all about the ‘cost of living crisis’? Why is our old measure of inflation – the Retail Prices Index – at 2.5%? Why don’t you feel richer (as you would if prices were falling)? Why can’t young people find anywhere affordable to live, and how is it that you would have doubled your money on a Hammersmith flat if you had bought in 2006?

• Read the full editor’s letter here: The deflation myth.