UK Deflation

In the year to April 2015 Britain entered into a period of deflation. Over the last year retail prices have fallen by 0.1%. This is not such a bad thing provided the deflation is not deep and long lasting. You may well ask why £385 billion of quantitative easing or money printing did not create inflation. Well it did; it inflated the price of houses, commercial property and stocks and shares. Of course, when the price of baked beans goes up it is a bad thing as far as economists are concerned but when house prices go up it is a good thing.

House prices going up is a good thing if you already own a house but it is not so good if you are a young couple paying £1,000 a month for a grotty flat because you can't afford to get on the bottom rung of the housing ladder.

House prices going up can also be a bad thing if they create a property bubble which when it bursts causes distress selling and repossessions. A property bubble could also bring on another financial crisis. Private borrowing to fund housing stands at almost £2 trillion. This level of debt is becoming unsupportable. We could be heading for trouble.

The causes of retail price deflation are a reduced oil prices, supermarket competition and the high level of the pound which reduces the price of imports. If deflation gets out of hand it will be difficult for the Bank of England to use the traditional policy of reducing interest rates to create inflation as rates are at an all time low.  Perhaps some more money printing will do the trick but this time the money should be given to the non-banking sector. The non-banking sector will spend the money on investment and purchases rather than property. Prices will then go up in the retail sector.

We need a bit of deflation in the property market and a little inflation in the retail market. The financial authorities should act now to achieve this. Inflation at 2% will help to relieve the debt burden for all of us.