How the UK entering deflation could affect you
For the first time in 55 years, the UK has entered deflation, with prices falling by 0.1 per cent in the year to April.
Not since March 1960, when Lonnie Donegan’s ‘My Old Man’s a Dustman’ was dominating the UK charts, has the UK seen a period of deflation. And much like Lonnie’s father, those who “don’t earn much” could stand to benefit from a brief spell of deflation.
To everyday consumers, having cheaper petrol and food than it was a year ago is obviously a good thing. Oil has fallen approximately 13 per cent and milk is 11 per cent cheaper than it was in April 2014.
But what about the farmers who make the milk or the companies that produce the oil?
Saying this, we look at whether deflation is a good or bad thing for the economy and how it could affect your everyday life.
Are we in deflation?
In the Bank of England’s quarterly inflation report last week, BoE governor, Mark Carney, said that: “A temporary period of falling prices should not be mistaken for a damaging spiral of deflation.”
Deflation is more of a long-term effect and, as the governor suggested, this is likely to be a temporary period, making it more of a time of negative inflation rather than deflation.
Is that a good thing?
Lower everyday prices of fuel and food is “unambiguously good” for everyone, according to the governor.
It was reported in the Telegraph back in January that we are likely to save £140 each as a result of falling fuel prices this year, and spending less on fuel and food means that we have more to spend on other things of choice – maybe new clothes or nights out, which, in turn, will mean boosted revenue for fashion chains or night clubs and restaurants.
It all sounds good. Why would negative inflation be bad?
Whilst buying fuel and food is instantaneous and needed, other more considered purchases such as buying a new car are optional. Being human, if we believe that something is going to be cheaper tomorrow than it is today, we will put off making the purchase in hoping to seize a better deal.
It is this stall in spending that could cause a majority of the economy to stall or slow.
Does this all mean that interest rates will rise?
For as long as inflation remains below the Bank of England’s target of 2 per cent, it is highly unlikely that interest rates will rise. In fact, the longer the period of negative inflation lasts, there is an increasing chance that interest rates could be cut even further to increase spending to boost the level of inflation.
But, as mentioned earlier, Mark Carney believes that the negative inflation will not last and that the Consumer Prices Index (CPI) – which measures the changes in the prices of consumer goods and services – will pick up towards the end of the year, and it is for this reason that economists still expect that interest rates will rise in the summer of 2016.
Deflation or negative inflation is something that many of us will not have experienced in our lifetime, so it is imperative that you should seek advice from a professional mortgage adviser who will be able to help you find the right solution for your needs.