Kate Rogers: Low inflation is here to stay, but it isn't all bad news

It is good for charities, able to buy more with their assets, and for poor beneficiaries, able to make limited budgets go further, writes our columnist

Kate Rogers
Kate Rogers

Be good, or deflation will get you. Deflation is the new bogeyman – what governments are threatened with if they are naughty. It seems that some of them are not heeding the warning, because it looks like a few major economies are drifting towards deflation. And that should be a worry, shouldn't it?

Deflation is feared because prices fall and people delay spending, expecting to be able to buy things cheaper tomorrow. They hoard cash and the economy grinds to a halt.

The UK and the US, among others, have seen inflation decline sharply over recent months. This is largely the consequence of the huge fall in oil prices at the end of last year, plus falling food prices. The cost of a barrel of oil fell by 40 per cent in the last three months of 2014 as a slowing China demanded less of it and supply was boosted by the fracking revolution in the US and a refusal by the Organization of the Petroleum Exporting Countries to cut supply from the Middle East. Prices are falling against the backdrop in the UK and US of generally robust growth, low unemployment and evidence that wages are beginning to rise. So is this a deflationary environment for these two economies? I don't think so.

Here, prices have been falling for plenty of products on which spending has increased – shoes, for example. The prices of household appliances have declined this year, but spending has been strong. Similarly, car prices fell in 2013, but purchases rose sharply. That is not to say consumers will never delay spending if they expect prices to fall, but the extent of an expected decline almost certainly has to be substantial before it brings about this type of behaviour.

In fact, for the US and the UK, falling food and fuel prices have boosted household spending and will continue to do so in the short term – and that is good news for our economy. It is also good news for charities, able to buy more with their assets; and perhaps for poor beneficiaries, able to make limited budgets go further.

Elsewhere, deflation is more of a threat. Japan has experienced deflationary tendencies for some time, and they are becoming increasingly evident in Europe. Falling prices can lead to a downward spiral in demand, employment and wages. The ageing population that is a characteristic of Italy, others in the eurozone and Japan can be deflationary too, because older people tend to spend less.

Without major structural reform within the eurozone, deflationary tendencies are here to stay and growth is likely to remain weak, despite the European Central Bank's attempts to boost activity. Weak growth in Europe, our major trading partner, is bad for the UK, although it makes our summer holidays on the continent cheaper. So beware of the European naughty step – it might have ramifications for all of us.

Kate Rogers is client director at Cazenove Charities

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