UK in Deflation Again

UK in Deflation Again.

The Office for National Statistics has released figures for September confirming that the UK is back into deflation i.e. consumer prices are falling.

The current rate of inflation is -0.1%. The move to negative inflation (which we last saw in April) has been attributed to falling energy prices i.e. oil and gas as well as food and for some reason clothes prices not rising as quickly as they were. That said, underlying core inflation is still positive at around 1% overall.

Why is deflation a worry?

Whilst it may be good for our pay packets that prices are falling it is still very dangerous for the economy overall. If prices continue to become cheaper people will not spend their money and wait until next month or the month after to buy their goods or services at a cheaper price. This means there is a risk of the economy stalling.

Could George Osborne secretly be happy?

The Chancellor of the Exchequer, George Osborne, suggests that Britain is not entering a period of long-term deflation and this is merely a slowdown affected by the historically low fuel prices given that underlying inflation is still positive. That said Mr Osborne will no doubt be very happy because many benefits that increase with inflation in April next year are linked to the inflation rate for September 2015. Does this mean that for all benefits except state pensions there will be no increases?