Deflation, But Not Today

Data today shows that the UK escaped slipping into deflationary mode for the first time in my lifetime by a whisker.

The last time the UK experienced deflation was in 1960 when:

  • Harold Macmillan was prime minister
  • Elvis Presley was discharged from the United States Army
  • Cassius Clay won his first professional fight
  • The farthing was still legal tender
  • Burnley were the kings of English football
  • Jonathan Ross was in the shit for the first time (yes I've Googled it - 17 November 1960)

Figures today from the the Office for National Statistics show that the RPI fell to a flat 0.0 per cent in February. Analysts had been expecting a figure of -0.5 to -0.7 percent.

It seems that today's figures are merely putting off the inevitable for another month. The Telegraph today is quoting a Deutsche Bank economist who is forecasting the RPI to drop to -4 percent this summer.

Deflation is defined as a sustained period of falling prices. It discourages consumer spending because shoppers think why buy today when things will be cheaper tomorrow?

The spin-off from that is slow economic growth, a further contraction in manufacturing leading to pay freezes and higher unemployment.

The RPI is also used to set the level of things like state pensions & other welfare benefits and also index-linked government bonds.

If the RPI slips into negative territory next month, the value of these things will fall relative to the value of public debt, effectively increasing debt burden.