BRITAIN posted zero per cent inflation for the first time on record in February, which is about as much on the cusp of deflation as you can get. We have known we are getting ever nearer the D-word, with inflation having fallen to 0.3 per cent in January from 0.5 per cent in December.
Even if we edge into deflation in this month or next, as many pundits believe, it will still be “good” deflation, however. That’s because there are bespoke factors pushing us there, most notably the slump in the oil price and the supermarket price wars.
When the oil price fall fades into memory, inflation will come back. Meanwhile, consumers are able to enjoy the fillip of having money in their pockets, which in turn will feed the economic recovery.
There is no sign of “psychological” deflation taking hold, where people put off purchasing and help create economic stagnation because they feel prices have farther to fall.
It is useful to note that core inflation – stripping out volatile items like food and fuel – was 1.2 per cent in February after rising to 1.4 per cent in January. Yes, it is at record lows, but it is still evidence that there is not generalised deflation in Britain.
Pity the confused savers of the country, however.
On the one hand low inflation does not eat into their savings, on the other hand it puts off the day when interest rates rise so that they can earn some decent money on those savings rather than pennies.
In other words, what low inflation giveth, low inflation taketh away.
It now seems quite amazing that last summer some were wondering whether interest rates would rise from their historic lows by early 2015.
Now it is hard to find a City economist who believes they will go up before early 2016. That is triggering occasional weakness for sterling on the foreign exchanges, as yesterday, the pound always somewhat undermined when the prospect of base rates rising recedes farther.
While deflation is a wild card for AG Barr
IT MAY not be deflation red in tooth and claw (see above). But it is still a potentially significant headwind for businesses serving a retail sector that detests an environment of falling prices.
Fitting into this category is Scottish soft drinks group AG Barr. It has proved a highly efficient operator for several years now, adept at compensating for periodic trading pressures with a rigorous eye on costs and processes.
But even Barr cannot totally second-guess how retailers will react amid deflation. Suppliers cannot be immune from price promotions, and it would be strange if there was not some collateral damage to the group if deflation is more protracted than many expect. That prospect took some of the sheen off another resilient trading performance in its latest financial year, with revenues up 2.7 per cent against a more flat 0.4 per cent rise across the soft drinks sector.
Barr’s strength is a differentiated brand proposition, with the likes of Irn-Bru, Rubicon and Strathmore normally able to hold their own against me-too products.
It is also usually in the vanguard when consumer tastes change, whether that is moving from carbonated to flavoured still water, or from cola to health and energy drinks.
Barr’s interest in acquisitions, including Funkin last month, should also give it extra routes to market to help insulate it against the deflationary chill.
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