While the Office for National Statistics (ONS) has recognised that slowing inflation rates pose the risk of deflation, it said while fuel and food prices are falling, clothing and furniture, for example, are rising.
The ONS stressed the distinction between CPI and core inflation, which currently sits at 1.4% and has generally been more stable than overall CPI.
“This reflects that most of the downward pressure on inflation in recent months has come from price movements for those goods excluded from the core calculation – notably motor fuel, food and energy prices,” said a statement from the ONS.
Low inflation headlines indicate a more fragile economy – not ideal leading up to a general election already characterised by uncertainty – and raise the question of whether a Japan-style deflation period is on the cards.
Brown Shipley CIO Kevin Doran said: “My answer to that is ‘I don’t think so’. We should perhaps be more concerned about the increasing divergence between asset price inflation and real world inflation. Many economists consistently fail to factor in asset price inflation, allowing bubbles to emerge relatively undetected, as has been the case with the steady rise in UK gilt prices.”
But much of the deflation talk is exaggerated anyway, according to Kevin Gardiner, global investment strategist for Rothschild Wealth Management.
In his recent essay, Deflation Deflated, Gardiner wrote: “The world economy will not stop turning simply because consumer prices fall a little.”
He went on to explain that prices tend to be lagging indicators, not leading ones.
“If the economy is slowing, we’d see that reflected first in the available data on order books and actual spending. The weakness in oil prices, which is driving much of the most recent deflation, is largely driven by excess supply. And the immediate opening-up of trade between the West and China, for example, happened perhaps a decade or more ago.”
The falls in prices will not register dramatically with consumers, as he said cheaper petrol simply frees up cash to spend elsewhere. But even if falling prices were to have a bigger impact, it would not necessarily influence their spending behaviour on larger items due to a less certain jobs climate.
“There has not been a period of significant deflation in the developed world since the Great Depression. If we’re in another Depression we’ll probably know about it and have other things to worry about.”
Of even ‘Japan-style’ deflation, Gardiner is dismissive: “The deflation Japan experienced was statistically insignificant – prices fell by just 8 per cent in total over 14 years – and was almost certainly a consequence, not a primary cause, of Japan’s prolonged stagnation.”