Negative inflation hits UK

Negative inflation hits UK: The UK inflation rate turned negative yesterday, for the first time since Harold Macmillan was prime minister in 1960. It dropped to -0.1% in April: Pennine Business News’ Reuben Cutts looks at the implications this could have.

All firms in the north-west can expect to see their margins squeezed, because prices across the economy will fall – but it isn’t as simple for employees’ wages to fall.

If your wage does fall, you will face the problem of ‘debt deflation’. This is because the amount you owe will not decrease, but the money with which you have to pay it off does decrease. This could be an especially difficult issue within the eurozone, given the debt countries like Greece are in.

Retailers in the north-west may notice a reduction in sales. This is because the consumer can expect things to become even cheaper, thus reducing the demand for goods.

Unemployment could increase in the region, because if companies are unable to reduce many of their employees’ wages, then they will not have the means to take on new staff. That said, we could see another increase in zero hours contracts, as this provides businesses with the security they need to take on employees. This is due to the employee – who is effectively self-employed – having no rights, which means that their employment can be terminated under any pretext.

The most ominous implication is the difficulty that arises to loosen monetary policy. This relates back to consumer spending. Because consumers may put off spending, demand shrinks. To combat this, central banks can turn interest rates negative, attempting to force spending from consumers. But the consumer doesn’t like this. They keep their money else where – in the sock draw perhaps – and so there is less money for policymakers to play with. But national debt is increasing in real terms, so then comes another loan. Before you know it, recession hits again. Redundancies occur, and we’re all in the mire. But hey, at least prices are going down.

But, this is not ‘proper’ deflation; this will be short-lived. The governor of the Bank of England, Mark Carney, believes that “over the course of the year, as we get towards the end, inflation should start to pick up towards our 2% target”, and according to Chancellor George Osborne, this current spell of deflation shouldn’t be perceived as “damaging deflation”. Take advantage of it while you can.

Reuben Cutts

Reuben Cutts

Reuben Cutts is the Editor and main writer for Pennine Business News. His role focuses on the site's day-to-day publications, and he is the main content producer.

His experience in editing includes work on behalf of the European Commission, the Financial Conduct Authority, and numerous county councils. He has worked extensively for Plain Language Commission.
Reuben Cutts

Leave a Reply

Your email address will not be published. Required fields are marked *