deflation

We are probably not facing deflation but if it does come to affect us for the first time in half a century or more beware rural businesses – staples like food and other raw materials take some of the biggest economic hits. The article tells us:

Deflation is where prices fall across the board for a sustained period. It is an environment in which consumers put off making major purchases because they assume that the TV, car or freezer they want will be cheaper in the future than it is today. With consumer confidence high and unemployment falling, there seems no immediate prospect of this happening.

Indeed, the opposite may well happen, with consumers tempted to increase their spending because their monthly pay cheques stretch further. Earnings growing at around 2% a year in conjunction with inflation 0.1% lower than a year ago equals a modest increase in real incomes that are likely to keep shop tills jangling in the months ahead.

A cut in average earnings growth from 2% to 1% would suggest the economy was in a downward wage-price spiral

All that said, a wary eye needs to be kept on the inflation numbers. Core inflation – the cost of living excluding volatile items such as energy and food – fell to 0.8% in April, the lowest since 2001. If it fell further, the risk of deflation proper would increase.