A Timely Look at Deflation – CII R02, J10, J12, AF4
Last updated on September 25th, 2019 at 4:41 am
Inflation is something we are reminded of throughout many of the CII manuals – mostly within the investment modules, but also it crops up in others, so we know what inflation is and we know it should be of some concern to investors. It’s deflation though, that is currently in the news and up until now, this is something we have only read about in theory, so we thought we’d have a closer look – useful information for those studying for any of the CII R02, J10, J12 or AF4 exams.
Deflation is the opposite of inflation
Deflation is basically the opposite of inflation – prices are in decline and we have a negative inflation rate; this is the first time we have seen negative inflation in more than 50 years in Britain, with lower energy, fuel and food prices. It should be good news for households as these goods become less expensive, and for the first time in a long time, wages are not falling in real terms. It also should mean that if we are spending less on fuel and on food, then we have more cash for other things. Anyone filling up a car regularly will not be surprised to learn that on average we are each expected to save almost £150 this year, because of lower petrol prices. That’s the theory, but the reality is that individuals become reluctant to spend money on non-essentials such as new cars and televisions, if they think that these will be even cheaper in the future.
Not necessarily good news for everyone
For others relying on savings, then it’s not such good news as it will mean interest rates are likely to stay low for as long as inflation stays low – experts have predicted that interest rates will not rise now until at least this time next year.
Deflation is also not good news for the economy, as once the prices of goods fall, then the risk is that reduced manufacturing follows which in turn leads to reduced profits. If this continues for too long, then unemployment can be the eventual unwelcome outcome.
Economists say it’s temporary
At the moment, economists are saying that the current situation of falling prices was expected and is only temporary with the Bank of England predicting it will pick up again over the coming months. We need to remind ourselves that deflation is regarded as a sustained fall in the cost of living, rather than a temporary drop below zero which some are currently describing as merely ‘negative inflation’.
Latest figures from the ONS state that transport costs were 2.8% lower in April than the same time in 2014 and food is 3% cheaper. The MPC has predicted that inflation will return to the 2% target within 2 years.
Grab the resources you need!
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Over to You…
So even with cheaper prices, there’s a downside. How do you think deflation will affect you, personally?