Noflation has arrived in the UK, with the publication of the latest official price inflation figures from the Office for National Statistics (ONS).
For the first time since official records began in 1989, price inflation as measured by the Consumer Prices Index (CPI) has fallen to 0%.
It’s not inflation, it’s not (yet) deflation, so it must be ‘noflation’.
Prices for goods and services are being pushed lower by the falling oil price, a bit of a price war breaking out at the supermarkets, and falling prices for books, toys and games.
Economists had expected a very modest inflation figure of 0.1% for the year to February, so the announcement of ‘noflation’ took the markets slightly by surprise.
As you might imagine, Chancellor George Osborne immediately took to Twitter and spun the announcement as good news:
Inflation at zero is a first for the British economy. Low inflation due to falling oil prices is good news for family budgets
— George Osborne (@George_Osborne) March 24, 2015
Is a brief period of deflation coming next? We think it probably is.
Deflation can be bad news for an economy, especially a still fragile economy, because it can deter consumers from making purchases until prices fall further.
If you knew there was deflation and that new television you wanted would be x% cheaper this time next month, you might wait to buy it. This means less money being spent on the High Street as consumers hold fire and, potentially, a period of economic contraction.
So, put simply, deflation tends to be considered bad news for the economy.
Not all deflation is necessarily bad, though. John Hawksworth, chief economist at PwC, has been quoted this week as saying:
“We think this would represent a good form of deflation in which lower global food and energy prices provide a much needed boost to household real income levels, helping to end the real wage squeeze of the past six years,”
So that’s OK.
It’s also worth noting that the Bank of England is continuing to forecast inflation returning to target over the medium term, which actually suggests a period of higher than target inflation in order to bring the average back to 2%.
The Bank has already commented that it would be “extremely foolish” for them to “lean against” this current spell of low inflation by cutting interest rates further. So don’t necessarily expect an even cheaper mortgage in the near future.
We do however believe that interest rates are likely to stay lower for longer as a result of this ‘noflation’ leading into deflation.
A lot of what happens next to the British economy will depend on the outcome of the General Election in May and global events outside of the control of any policymakers.
There could well be some interesting times ahead.
