Inflation Deflates!

In May 22, 2015
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Figures from the Office of National Statistics has shown that Inflation has dipped to an all time low in the last half a century. The Consumer Price Index has measured the Inflation rate from April 2015, as -0.1%. However, it is predicted that inflation will begin to rise by the end of 2015 and the Bank of England are trying to bring Inflation up to the 2% target within the next two years.

So whilst the low rate will mean low energy prices and low food prices, this is not expected to last long! But what does this all mean – well low or negative inflation can be a great thing, especially for consumers! Everyone can enjoy lower costs in the supermarket and at the pump, which in turn means we all have a bit more spare change in our pockets.

It is also good news in some ways for savers as they now have more buying power with their money! In addition, we are currently in a trend of rising employment, which means we have more in the economy and that money is also going further, which isn’t a bad thing, as echoed by David Cameron. Cameron Tweet

The downside to being in this state of deflation is consumers are likely to put off purchases, expecting the rates to drop further. When in reality, Inflation will rise again and therefore the purchases that were postponed might in fact cost the consumer more in the long run. Additionally, there is always the fear that permanent Deflation could set in and actually weaken our economy and so it is always a balancing act between the two factors. No one wants high inflation, but we can’t have a sustained and permanent Deflation situation.

That said, the Bank of England is clearly not in a hurry to raise interest rates either. All nine members of the Bank’s monetary policy committee are in favour of official interest rates remaining at 0.5%, which is where they have been since early 2009. That’s because although there’s a potential dark side to the fall in inflation, i.e. the risk that it becomes a permanent feature of the economic landscape.

The reason the majority of economists view the current deflation as benign is because they think lower unemployment will put upward pressure on salaries. Higher pay deals will start to push up inflation at a time when last year’s drop in oil prices starts to unwind. There is, on this view, little prospect of deflation becoming embedded, as it did in Japan. This, though, assumes that salaries are not dragged lower by the drop in inflation.

The fact that average earnings are growing at an annual rate of below 2% even after two years of a relatively robust period of growth is indicative of a labour market where employers are able to secure workers cheaply. They may be tempted to be even less generous once inflation goes negative. And so that is the million dollar question on everyone’s mind.

The reality is no-one knows exactly what will happen, but my advice is enjoy this period of deflation while it lasts, as I don’t think it will be here to stay!

 

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Jasmine has been a qualified Financial Planner since 2008. She has also been a member of the Society of Will Writers since 2012. She is passionate about helping Clients build their wealth and achieve the financial lifestyle they desire. Her areas of expertise are that of Savings, Investments, Pensions and Retirement Planning.

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