Britain falls into deflation for first time since 1960

May 26, 2015

Lucy_2 (Custom)By Lucy Palmer-Richeson

Government figures have revealed that Britain has now fallen into deflation for the first time in more than half a century.

This means the overall price for services and goods has fallen, though only by a tiny amount. Prices, which are measured by the consumer prices index (CPI), fell by 0.1% in the year to April 2015, after no changes in the year to March.

This is, of course, great news for consumers. Food is now 3% cheaper than it was in April 2014, and it is now 12.3% cheaper to fill your car with fuel.

The Chancellor George Osborne said on Tuesday: “Today we see good news for family budgets with prices lower than they were a year ago.

“As the Governor of the Bank of England said only last week, we should not mistake this for damaging deflation. Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.

“Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them should they arise.”

Deflation can mean disaster for the economy, especially if it continues over a long period. However, economists are almost certain this is not the case and believe that this drop will be short-lived, possibly only lasting through the summer.

Professor Mark Taylor, Dean of Warwick Business School and former Bank of England International Monetary fund economist, explained: “This kind of deflation is not bad for the economy because it’s coming from the supply side – weak energy and food prices – rather than any fundamental weakness in the demand side or consumer spending. It’s also expected to be temporary as the oil price has rebounded and commodity prices have stabilised.

“Deflation is only bad for the economy when prices are expected to continue to fall and people postpone consumption, which weakens demand and leads to further falling prices, in a vicious downward spiral.

“But with average earnings rising in the UK and consumer spending still buoyant, a temporary dip in prices is not a problem – in fact, consumers are very slightly richer as a result.

“The key issue for the UK economy is whether productivity – total output for every hour worked – will pick up now the election is behind us. We’re still producing less per worker than in 2008, and that won’t change until firms feel confident enough to spend money on capital investment rather than just taking on extra workers. When we see a strong recovery in business investment and rising productivity, the UK economy will finally be recovering soundly.”

For now, Brits can enjoy the cheaper food and petrol and expect inflation to pick up again towards the end of the year.