Wednesday, 15 July 2015

Financial situation today

Yesterday [Tuesday 14th July] the ONS announced that inflation in the UK was at 0% once again.

What does this mean?

Firstly the figure means that the cost of living is the same as it was a year earlier, but that does not really help us understand the meaning of 0% inflation.

We have to look at the reason why inflation has fallen. At least part of the fall in UK inflation is due to temporary short term factors, such as falling oil and petrol prices. These temporary factors are unlikely to continue, and could be reversed. It is more important to look at underlying inflationary pressures – core inflation, which excludes volatile prices like food and oil.

Falling prices could boost real incomes. One of the fears of deflation is that it depresses consumer spending. However, with a fall in the price of basic necessities like petrol and food, consumers find their discretionary income / spending power has increased, this could actually lead to higher spending in the short-term.

The big concern over 0% inflation are the long-term expectations and I have no idea what could happen over the long term especially with what is happening in Greece and Europe.

Of course the next step down is deflation, and we do not want to go there.

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