Deflation 2 Months in a Row

Deflation 2 Months in a Row.

The Office for National Statistics has this week released its figures for inflation in October. Negative inflation at 0.1% continues for the second successive month.

The UK saw deflation for the first time since records began in April this year and yet again we are back to deflation i.e. negative inflation at present.

The Office for National Statistics put this down to continued reduced fuel prices and as a result indirect falls in the costs of food and drink (transportation costs) but maintains that general living expenses for clothing and other luxury items such as entertainment continued to rise. In short, given reduced costs for basic living essentials we appear to have more money to spend having a "good time".

Why is deflation dangerous?

If prices are falling, this means that goods may be cheaper next month compared to this month, this means that some people will put off spending their money and could result in a spiral effect of slowing the economy to a standstill.

What of interest rates?

We have already seen statements made by the governor of the Bank of England, Mark Carney, suggesting that given the potential slowdown, interest rates may not rise now until the end of 2016.

Comment

We are on a knife edge here. Lower general living costs makers feel better and clearly we are spending more on recreation. This could mean that the demand for stock markets could rise if interest rates remain low investors will look to equities for yield percentage. But if deflation really takes hold we are in for a rocky ride as we saw in Japan over the last 20 years or so (in Japan during a sustained period of deflation they even printed money and gave it away to encourage people to spend, desperately trying to create inflation).