Comment: Why a little deflation is a good thing

Martin Flanagan
Martin Flanagan
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WE SLIPPED into deflation last week – but don’t panic. In terms of a threat to the UK recovery, it barely constitutes one-and-a-quarter horsemen of the apocalypse, although its like has not been seen since the 1960s, that time of Ford Zodiacs, football shirts without advertising and Harold Wilson’s “white heat of technology”.

Last month, inflation turned negative at 0.1 per cent. But, forgiving the oxymoron, this is good deflation. It has been widely expected, is almost certainly transient, and in the short term it actually puts more money into people’s pockets, as real wages also continue to rise, and so sustains a predominantly consumer-led economic rebound.

This is not bad deflation. That would be really worth worrying about – when falling prices are seen by consumers as hard-wired into the economy, and so purchases are put off, triggering even more deflation and economic stagnation.

Japan experienced some of this pain when its asset bubble burst in 1990, and the country embarked on two virtually lost economic decades. When real deflation strikes it is a sobering and chronic issue.

Why can we afford to be far more sanguine about our current situation, then? One, a key reason for many months of low inflation and now negative inflation was the sharp fall in oil prices in 2014 and early into this year.

Black gold plummeted from $110 a barrel last June to $44 this January. But it has already recovered somewhat to about $65, and the Iranian deputy oil minister forecast last week that the price may hit $80 by the end of this year. Just by itself, the recovering oil price will drag us out of April’s, and perhaps May’s, deflation. We are not in any sort of downward spiral.

There is perhaps more of the whistling in the wind about economists believing that an end to food price deflation, as supermarkets eventually row back from the current price promotion war, will also bring back a modest inflationary environment.

There is no sign of the supermarket price war easing, from Waitrose and Marks & Spencer at the top end of the market to the German discounters at the sharp-elbowed base.

Even so, our deflation looks eminently manageable. It has lowered costs for businesses outside of the pressured North Sea oil sector, and that will not harm investment to further drive the recovery and inflation with it.

Meanwhile, the Bank of England, which usually takes a cautious view, has said the bout of inflation near to zero that preceded the dip into technical deflation is largely accounted for by unusually low contributions from energy, food and other goods prices. In the absence of further falls in commodity prices, inflation rates close to zero, never mind deflation, should not last long.

We should just enjoy the ride of more cash in our pockets before interest rates rise, probably early next year.