Deflation - what's not to like?

 

by Tim Dowling

 

At last: inflation is down, to 4.5%. True, if you'd spent the last four months in a coma that would still sound really high to you, and yes, it is well above the official target of 2%, which means, technically, the governor of the Bank of England has to write a letter to the chancellor, but at least now he can write: "You know what? Let's not worry about inflation. Inflation is the least of our problems."

The big worry these days is the possibility of deflation. At first glance, deflation might sound like good news, so let's stop at first glance. In times of deflation, your money will increase in value as it sits in your pocket. Hooray! Prices will fall. In fact, prices will fall so sharply that you won't know whether to buy an incredibly cheap thing or wait until it gets even cheaper. Deflation: what's not to like?

Deflation is only a problem if you're the one trying to sell the cheap thing, or if the incredibly cheap thing is your salary, and your boss can't decide between paying you peanuts and finding someone else who will do your job for even less. In these circumstances investment becomes a little bit pointless, and growth halts, and a deflationary spiral ensues leading - allegedly - to long-term depression.

That's a bridge best crossed when we come to it. For now, all you need to know is that prices are falling, and will fall further, and so will interest rates, and that compared with this time next year, you are living in a relative economic paradise. Enjoy it while you can.

http://www.guardian.co.uk/business/2008/nov/19/recession-inflation