In April 2015, UK inflation fell below zero, turning inflation into “deflation”, for the first time in over 55 years. In May 2015, it bounced back into inflation yet only at 0.1%, reported by the Office for National Statistics (ONS). The key reason for this fall was due to declining global oil and food prices, which are since recovering.
Here we take a brief look at what the experts are predicting for the future.
*the graph is for illustration purposes only
Is deflation a good thing for the UK economy?
For UK consumers, deflation or falling prices can be seen as a good thing, at least in the short term. But what about for the economy?
On one side, those businesses who are having to cut their costs, such as fuel companies and food manufacturers, including the smaller business owners such as farmers, obviously feel the pinch on their profits at times when they are forced to reduce prices to meet market demand.
On the other side though, when the costs of goods such as fuel and food are lower, more disposable income becomes available for consumers to spend on what can be considered “luxury items”. This could include clothes, nights out and meals in restaurants, as examples, therefore boosting other areas of the economy.
“Rising wages and falling prices is a good combination for working people and family budgets” George Osborne, Chancellor
Holding your horses
It goes a step further though as typical human buying behaviour dictates that if we see prices are declining we will hold on making key purchases in the expectation that prices will fall further, therefore, even when disposable income is available, there can still be a stall in sales due to hesitancy.
What the experts predict regarding inflation
Mark Carney, governor of the Bank of England (BOE) passed comments on the term “deflation”, which typically refers to a more longer term economical effect and suggests April reflected more a month of falling prices, or at the most “negative inflation”.
It was predicted by economists that April would be only a whirlwind of deflation and since then both fuel prices and airline prices are recovering.
BOE policymaker, Kristin Forbes announced that “inflation is likely to rise quickly again early next year“. The BOE also predict inflation will rise to 0.6% later this year, 1.6% in 2016 and back at the 2% budget benchmark by 2017.
Forbes back this prediction suggesting inflation will be at approximately 2% by late 2016.