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Inflation is now below zero – just rejoice at that news

19 May 2015

12:15 PM

19 May 2015

12:15 PM

After a couple of months of teasing the rate of inflation fell below zero to -0.1 per cent in the year to April, thanks largely to the falling costs of good and transport, especially air fares (something that’s affected by when Easter falls). It’s the first time that CPI inflation has fallen below zero since records began in 1996, and the ONS estimates that it’s the first time the rate would have turned negative since 1960.

Ignore the pointy-heads who say that terrifying deflation is now upon us. Inflation has been outstripping earnings growth for years – it’s great to see that process reversed. So far, this low-to-zero inflation has not seen consumers deferring purchases: they’re still spending. And surveys of consumer confidence show that people are getting more keen to make big purchases; the GfK index for people planning major purchases (below) shows confidence flooding back in as inflation falls. So the UK isn’t in danger of the harmful deflation that can be caused when people put off spending.


Screen Shot 2015-05-19 at 12.17.36

Workers’ wages are going up, too, at a rate that outstrips inflation – another boost for their spending power. But that extra spending – as well as the effects of the oil price crash dropping out of the figures – will push inflation back up. The graph below shows what Scotiabank’s economists expect to happen to the rate:

Screen Shot 2015-05-19 at 12.20.23

 

What’s needed for wages to grow in the long-term isn’t for prices to fall, but for productivity to rise. On the ONS’s latest figures, workers’ productivity is falling, and it’s still below its pre-crisis level. That’s been a good thing because it’s meant more people in work and avoiding the harmful effects of unemployment during the crisis, but if productivity doesn’t rise when we reach ‘full employment’ people will really start to wonder where their recovery is – and it will be a big problem for the government.


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