Wikinvest Wire

Britain sinks into deflation abyss

Tuesday, May 19, 2009

The British have succumbed to the scourge of deflation and about all the rest of the world can do now is bid them a fond farewell - they've entered the abyss, as reported by the Telegraph.

Britain sinks into deepest deflation since 1948
The British economy sank deeper into deflation last month to the lowest level in more than 60 years as the effect of falling house prices and lower mortgage repayments escalated.

Inflation on the Retail Prices Index (RPI) measure, which includes housing costs, dropped sharply to -1.2pc in the year to April, from -0.4pc in March, the Office for National Statistics (ONS) said on Tuesday.

It was the lowest RPI figure since records began in 1948, and weaker than economists had expected.
The number of times that economists have been taken by surprise over the last few years has been increasing at such an astonishing rate that, sometimes, you have to stop and wonder why we even keep them around.

Maybe we'd be better off with no forecasts and no expectations for the future at all.

More importantly, you have to wonder why their counsel continues to be sought in order to remedy the ills that took them by such great surprise.

Anyway, on the subject of de-flation, the British method of measuring the changes to consumer prices appears to be even more dysfunctional than the one used in the U.S. as central bank lending rates have a direct impact on their broadest measure of inflation which happens to include interest paid via mortgage payments.

So, all other things being equal, if interest rates are slashed, inflation goes down, whereas, if the bank hikes lending rates, inflation goes up.
The main driver of the fall was lower mortgage interest payments following the Bank of England's decision to cut interest rates by half a percentage point to 0.5pc in March, the ONS said.
...
Although in the short term falling prices will appeal to consumers, RPI is used to calculate wage increases so the sharp fall in April is likely to add to downward pressure on salaries already caused by higher unemployment and falling corporate profits.
IMAGE "As a result, many workers are likely to get wage freezes or even pay cuts," said Howard Archer, chief UK economist at IHS Global Insight.

Deflation poses a further threat to the economy if people expect prices to fall further and put purchasing plans on hold which can, if the trend persists, lead to lower output and even more job losses.
There's the real evil of inflation - right there in that last paragraph...

If people see negative numbers showing up in the government's measure of inflation, they'll stop obsessing about the ongoing financial market meltdown and how it must ultimately lead to the end of life as we've known it and promptly cut back on their already sharply curtailed spending plans in hopes of getting a better deal sometime in the months ahead.

6 comments:

Anonymous said...

still not buying the whole deeeeeflation meme, eh Tim?

Reginald said...
This comment has been removed by the author.
Reginald said...

The biggest economic lie ever told: lower prices will lead to less consumption. It's shocking to me, because common sense says the exact opposite. Under this nonsense if computers went up to $1 Billion per laptop, people would consume MORE of them?!? Also, if computers fell to $5.00 per laptop, people would consume LESS of them?!? Nevertheless, the widely accepted view the emperor has clothes continues.

Anonymous said...

The central banking system(s)requires inflation as a means of keeping their worldwide lending scheme alive. How else can they sell the requirement to create more fiat money to collect interest on? The politicans of the world love the idea that they can continue to spend unlimited money on corrupt, inefficient, projects without introducing new taxing requirements directly to the citizens. A perfect partnership for everyone except the taxpayer.

Anonymous said...

Reginald said...

"The biggest economic lie ever told: lower prices will lead to less consumption. It's shocking to me, because common sense says the exact opposite. Under this nonsense if computers went up to $1 Billion per laptop, people would consume MORE of them?!? Also, if computers fell to $5.00 per laptop, people would consume LESS of them?!? "

Reg - If computers were $1B per laptop today, & people were pretty sure they would be $2B next week, then everyone with any neccessity to buy one would ( at least try to) buy it NOW. ( This is why everyone in Zimbabwe spent their pay the instant they got hold of it).

Similarly, if computers fell to $5 per laptop this week , and people were pretty sure that next week they would be down to $2, they would indeed buy less of them this week.

Counter-intuitive, again , maybe, but also strangely obvious.

Anonymous said...

Reginald, when prices fall temporarily, like in a sale, we know the price will go up again soon so we rush out and buy. But when prices fall and keep falling, we hold off until we either can no longer wait or we feel prices aren't going much further down.

I'm doing it right now. I'd like to move but I don't need to move. I keep seeing rents going down, so I figure I'll wait until I see something I must pounce on.

A lot of economics is counterintuitive, at least at first. When prices were zooming and out of reach, we had record high homeownership and record low defaults. You'd think that high prices would price more people out of the market and force people into defaults, but prices were high because demand was high (among other reasons) and owners in trouble could easily sell.

  © Blogger template Newspaper by Ourblogtemplates.com 2008

Back to TOP