Worried about deflation? Then you should check the news

Anyone who thinks we might be living in deflationary environment should check the headlines. If they can, that is. Much of the BBC is on strike, so those of us who usually get our news from the likes of the Today programme have been out of luck.

We’ve had to look elsewhere to find out that the Producer Price Index (PPI) is now running at 4%. That’s up from 3.8% in September. And even if you strip out all the pesky stuff that makes numbers like this volatile (food, drink and petrol) the index was still up 3.3% in the year to October.
The coalition must be delighted. Why? Because more than they need anything else, they need inflation. That’s because their “cuts” aren’t absolute cuts. Look at the Comprehensive Spending Review and you’ll see that an awful lot of spending was not cut but frozen. And that when cuts were actually mentioned they were cuts in “real terms.” The cash spent is to keep going up, but the value of that cash is supposed to go down.

It’s the most painless way of cutting spending. But it obviously only works if we have inflation – and the higher the better. If we end up with deflation – or even inflation at a mere 1-2% – there won’t actually be any cuts at all. Instead, spending will go up in real terms. That really wouldn’t be good. So what with the $600bn in quantitative easing in the US, the strikes (always a hint of rising financial fear) and the PPI numbers, odds are there’ll be sighs of relief all round at Downing Street today.