Is Britain really entering a period of deflation?

A month ago the experts were predicting an era of deflation once the retail price index was published. I cast doubt then and do so now on this analysis. The danger for the British economy is inflation not deflation.

This morning’s press was again full of the experts predicting a negative rate for the RPI. The guesstimates were for a fall of between 0.5 and 0.8 per cent. (It is the oldest and most comprehensive index. It excludes only some atypical households)

For the second month running the experts are wrong. The RPI registers this month an overall nil increase in prices.

Examine the inflation target set for the Bank of England. The bank is to aim for a 2 per cent rise in the Consumer Price Index. Last month it was 50% above this level but it still did not stop the commentators shouting about deflation. This month it has risen up to 3.2 per cent. It will be interesting what the Governor says in the letter he now has to write to the Chancellor.

Look at the other indices as well at the Consumer Price Increase. The All-Items RPI, excluding mortgage interest payments, rose from 2.4 to 2.5 per cent.

The core inflation rate – excluding energy, food, alcoholic and tobacco – rose for the third consecutive month up from 1.1 to 1.3 and now stand at 1.6 per cent.

The British economy is in a big enough mess without policy makers fighting the deflation dragon which shows not much sign of yet appearing on the scene. The 30 per cent collapse in sterling has still to be fully registered as an upward movement in these measurements. And the Government has embarked on a printing money policy which can only lead to ginourmous inflationary pressures.

It is inflation not deflation that is still the public enemy.

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One Response to “Is Britain really entering a period of deflation?”

  1. Jon Pols Says:

    Yes, there are not many people feeling deflation, some of the supermarket prices have shot up worryingly and I’ve noticed some items (like cheese) in smaller packets to keep the price down. As you correctly mention the collapse in sterling is bound to have an impact.

    There is also the possible consequences of ‘quantitative easing’ to consider. Alas, I do not have a mortgage that tracks the base rate.

    There has been much posting on blogs about an article from the Wall Street Journal “Inflation Is Tempting for Indebted Nations’ (30 March 09). http://online.wsj.com/article/SB123836516806167317.html

    ” … annual inflation could go as high as 8% to 10% within three to five years in the U.S., and sooner in the U.K.”

    I think this is a real possibility and am tempted by inflation linked bonds. But what are the chances of this high rate of inflation actually being reflected in the official inflation figures used for such bonds? (Who trusts any official figures?). Inflation is a secret method of taxation, a silent thief for us ordinary folk.

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