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Wednesday, 14 January 2015

European Deflation

Latest inflation figures in the UK indicate that deflation could be a major worry in the UK. Inflation in the UK fell to 0.5% which is a worry because if inflation becomes negative, falling prices can lead to a deflationary spiral. Consumers will put off purchasing goods because they know that prices will continue to fall, hence they will be able to save more money by waiting. Furthermore, in the Eurozone, there is deflation of 0.2%. This is one reason why deflation is such as hot topic among economists and businesses (for example, type 'deflation' into Google then click on the 'news' tab to see what comes up).

But I just came across a video on the FT where Sarah Gordon, the business editor, discusses how deflation may not actually be that bad, in the Eurozone. This perspective can also be relevant for the UK. The video explains deflation well and is worth listening to. One of her key arguments is that while inflation remains negative, the CPI is actually positive (0.8%), only being bought down by falling fuel and energy prices. This means that its important to consider what measure of deflation is being used in any figures given. Also, falling fuel prices means that consumers are actually benefiting because living costs have fallen. This might actually increase consumer spending rather than retard it. 

She also mentions that businesses are not worried about deflation because if the European Central Bank embark on a quantitative easing programme, they will buy sovereign and corporate bonds which will reduce interest rates. This is actually good for businesses because it reduces companies' debts.

This video can be accessed here.

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