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Cost of living crisis, Ed? The price of goods is now falling…

13 January 2015

9:53 AM

13 January 2015

9:53 AM

For goods, as opposed to services, Britain has just joined the Eurozone deflation club. This morning’s figures show that goods (i.e., the stuff we buy) were 1pc cheaper in Christmas 2014 than Christmas 2013.  Factor in services and still, UK consumer price inflation was 0.5pc in December, the (joint) lowest since records began in 2004 (pdf). Pretty bad timing for Ed Miliband, who has decided to fight the election on a ‘cost of living crisis’.

And his other bête noire, the energy companies? This is from the ONS press release explaining the low inflation…

‘The main contribution to the slowdown in the inflation rate came from prices for gas and electricity… In December 2013 a number of the major utility companies raised their prices. In contrast there were no increases in December 2014.’

So energy prices have been frozen – by the market, not by a politician’s diktat. Indeed, E.ON has just announced a 3.5 per cent drop in its standard gas prices. All this looks set to continue: here’s the CEBR’s verdict…

‘Falling food prices – a result of intense competition among UK supermarkets – have also played a major role in the low inflation figures. Disinflationary pressures look set to continue in the first half of 2015. Retailers are still in a phase of intense competition, petrol prices should fall back further in the first half of the year and utility companies are likely to cut prices given developments in wholesale markets.’

So expect Miliband’s ‘cost of living crisis’ to have less and less resonance as all this plays out.

Of course with oil price plunging, Britain’s problem could be that which now faces the Eurozone overall: keeping consumer spending going in an era where prices are actually falling. So if you wait, you save. As the Japanese have found, this is a rather difficult situation. But need it be so bad in Britain? Here’s the CEBR again:-

‘Conventional wisdom is that deflation is a bad thing which leads to a negative economic spiral as households stop making purchases in anticipation of future price falls. But this hardly applies when the main driver of deflation, as would be the case in the UK, is falling essentials prices; households won’t stop purchasing food because prices might be lower in a month’s time, and similarly if you need petrol for your morning commute you aren’t going to postpone filling up your car. With this kind of “good deflation” lower essential costs free up household spending power and boost demand for more discretionary goods and services.’

Adding to a feel-good factor just in time for a 7 May election. As George Osborne mulls the long-term implications of deflation, he can consider the short-term benefits. It’s now easier than ever for wages to grow faster than inflation:

And the oil crash means motorists should have it easier for months ahead of the election (prices are now almost 25p per litre below their 2012 peak). And the new zero era means that mortgages are now the cheapest in history (below). Even the Tories should be able to make something out of that.

Screen Shot 2015-01-12 at 13.35.59

And here’s a point from Chris Williamson, chief economist at financial information company Markit: the UK’s ‘misery index’ is at its lowest level since 2005 (and it’s set to keep falling). Ed Miliand has been trading on people’s fear about their economic prospects – but those prospects seem to keep getting better.

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