Comment: Low inflation a boon, but deflation a curse

Martin FlanaganMartin Flanagan
Martin Flanagan
SHARPLY falling inflation is a double-edged sword. On the one hand, it is good news for consumers, puts any interest rate rises even more on the back burner, and creates a feel-good factor ahead of next year’s general election.

Less promisingly, it raises the spectre of such low UK inflation possibly morphing into dangerous deflation eventually – a proven economy-basher as consumers stop buying because they think products will be cheaper farther down the line if they sit on their hands.

That can result in stagnation at best and recession at worst. Happily, we are not at that point yet, and most economists are not forecasting any imminent slide into deflationary waters.

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Still, it is something the Bank of England will be alive to, given that inflation has now fallen to a 12-year low of 1 per cent, well adrift of its medium-term target of 2 per cent.

It is all bar a racing certainty now that Bank governor Mark Carney will be writing a letter to Chancellor George Osborne in the coming months explaining the fact. Inflation has now been at, or below, the target level for 12 consecutive months.

One knock-on effect is it probably raises the ante for the two hawks on the Bank’s monetary policy committee – Ian McCafferty and Martin Weale – who have been voting in recent months for a quarter-point rise in interest rates, to continue offering their dissenting opinion in the face of such low inflation.

The slump in oil prices is one of the key drivers of November’s fall in inflation from 1.3 per cent the previous month.

Oil is trading at about $60 a barrel, compared with $110 at the start of 2014, and has plummeted 50 per cent since June (giving the Russian economy, in particular, a severe kicking).

That lowers industry’s input costs, and feeds through into lower high street inflation.

Another significant factor has been the fierce competition in the supermarket sector, a part of the economy that has already crossed the deflation Rubicon.

November’s figures showed food and non-alcoholic beverages fell 1.7 per cent on last year, the steepest drop since June 2002.

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As we enter the home straight for Christmas, falling inflation makes it easier for us to eat, drink and be merry. But let’s also keep a weather eye on just where the price decline may take us…

Stressing the positive for our big banks

Some may carp at Lloyds and Royal Bank of Scotland getting a narrow pass in the Bank of England stress tests. But, to borrow from football punditry, you can only beat what is in front of you, and the banks being tested – apart from the Co-op – managed to do it.

The stress test they surmounted was also not too far from apocalyptic in the perfect storm of simultaneous ­economic pressures it postulated. Well done the banking industry (there, I said it).