This morning Britain’s Office for National Statistics reported that inflation had dropped to 0%. This is the lowest rate Britain’s seen since 1933. Cheap energy costs and a food price battle between British supermarket chains were the chief causes for the CPI deflation. Projections show the pound going into deflation in the coming months.
Deflation poses a risk to the economy. It is an interest rate story; deflation makes today’s consumption look more expensive relative to some time in the future and consumers postpone purchases. Also if inflation is low, rates can’t fall far enough to help boost the economy.
Sources: From hero to zero, Why deflation is bad
7 Comments
Interesting post, especially the fact that inflation has not been this low in Britain since 1933. Moreover, in that time period, Britain has seen a World War, a large economic recovery from the war, as well as numerous changes in its economic makeup over the past 80+ years. With that being said, do we think that there will be any long term consequences from this trend?
I understand that in the short-run, consumers postpone purchases, but I can’t imagine that this would occur in the long-run?
Do they? To frame that decision in a local context, would W&L students skip Fancy Dress because next year will be cheaper? and then if deflation continued, skip it against because the year after will be yet less expensive?
That is very surprising to see that Britain’s inflation has not been that low since 1933, especially considering, as mark pointed out, all the significant historical events that have occurred since then. Deflation would be abad state to see Britain enter.
Is there any information on the core CPI for Britain? Excluding volatile oil and other energy expenditures may show that prices are actually more stable than it appears on the surface. If the inflation rate is as low as the article posits, would this be a good time for the British government to decrease its unemployment rate (assuming the trade-off seen in the Philip’s Curve)?
Keifer asks one sensible question, that “headline” inflation may not be particularly meaningful.
More generally, is very low deflation any different from very low inflation? Yes, central banks complain, because that casts doubt on their capabilities. But is there any empirical evidence that “price stability” (inflation / deflation under 2.5% in absolute value) differs when it’s on the minus side rather than the plus side? Look for Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann, “The costs of deflations: a historical perspective”
If anything, Britain’s control over their currency ought to be a welcome thought as we watch countries throughout the eurozone struggle to manage themselves under a broader currency regime.
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