Tag Archives: deflation

George Osborne is right. News that the main measure of UK inflation turned negative for the first time since 1960 isn’t a cause for concern. Yes, prices in April fell, which means deflation is official – and that hasn’t happened for over half a century. As the Chancellor says, though, UK deflation is far from entrenched and will rapidly reverse.

I’m more worried about early but significant signs of distress on Western sovereign bond markets. Our newly elected Government should be worried too. The British state is still borrowing very heavily, servicing an ever-growing debt pile. And if the UK gilts market goes haywire, with yields rising as investors demand higher returns, that would upend the economic recovery and put a somewhat different gloss on the Tories’ second term.
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What are we to make of the UK’s ultra-low inflation rate? I think it should be viewed as good news – at least, on balance. We should remember that while low inflation feels nice, the main reason it’s happening isn’t necessarily beneficial to the UK economy as a whole. The recent collapse in oil prices puts a bit more money in our pockets, but it’s jeopardising our North Sea operations, one of the UK’s most important industries.

Above all, our reaction to low inflation, mustn’t dissolve into some kind of “deflation panic”. The zombie bankers, share-boosters and government debt junkies would then use it as an excuse for another round of mega-money-printing by the Bank of England, euphemistically known as quantitative easing. That would be seriously counter-productive – and must be avoided.
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How is the Eurozone economy doing? Given that the 18 countries sharing the single currency comprise the UK’s biggest trading partner, accounting for around half our international commerce, this is a question of major economic and political importance.

Whether the Eurozone stages a meaningful recovery over the next 12 months, stagnates, or collapses amidst a fully-blown melt-down – which remains depressingly plausible in my view – will significantly influence the UK’s economic path, determining the backdrop against which the 2015 general election is fought.

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This weekend, with the Greek Parliament staging a dramatic “make-or-break” vote on monetary union, it would be easy to lose sight of what’s happening in the UK. Events in the eurozone are dramatic, to say the least. Those who talked breathlessly of “a resolution” are being forced to think again. During the first five weeks of 2012, granted, global equities posted their best opening to any year since 1987. Was this the start of a genuine recovery, though, or just a Suckers’ rally?

The answer could hinge on what’s now taking place in Athens. Or, at least, if the deal finally forged between private sector Greek creditors, eurozone governments and the European Central Bank isn’t absolutely credible, the recent rally could quickly go into reverse.
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