Is deflation really a bad thing?

Well, for me, at present, I would have to disagree.

Inflation is a measure of the price of a basket of goods.

There are various different measures which represent slightly different baskets, however, in broad terms, if the prices of the goods go up year-on-year then we have inflation, if they go down, we have deflation.

UK CPI (Consumer Price Index) recently printed at only half a per cent year-on-year.

An increase in prices, but a miniscule one and well below the Bank of England’s two per cent target.

So much below in fact that the Governor of the Bank of England, the cool Canadian Mark Carney, will be forced to write an open letter to the desperate to be cool Chancellor, explaining why prices are rising so slowly.

So what is driving prices down?

Well, largely, oversupply in the energy markets and a shoot-out between the discount and mid-market grocers.

Scottish Power has followed rivals British Gas and Eon in cutting the cost of household gas supplies in response to falling wholesale prices.

Oil prices are leaving motorists singing as they pull away from the forecourt and even good old fashioned milk is helping out the consumer by trading at levels lower than its marginal cost of production, due to the import ban imposed on Russia.

Economists argue that falling price rises or deflation, lead to delays in purchases and ultimately slower growth in gross domestic product.

However, I don’t believe this enters the consumers mind to any great degree.

If my wife decides we need a new car, despite my very best efforts, we will be getting a new car.

I try to explain to her that prices are falling and that if we sit tight for another year we will be able to save, say, a hundred pounds.

She kindly acknowledges my thought process and then points to the broken wing mirror, balding tyres and the mini disco created by the various engine warning lights on the dash board.

The cost of living is always a hot political topic and after years of inflation out pacing wage growth it’s hard to expect the woman in the street to swallow the theory that her saving a few pounds on her weekly shop is a bad thing. As a daily commuter from Saltburn-by-the-Sea to Newcastle, falling oil prices are good for me.

I am not going to complain, the more disposable income I have in my back pocket at the end of the month, the better.

What does concern me is continued periods of deflation.

If businesses stop investing in machinery, scale back projects, lay off workers, it is easy for an economy to fall into a dangerous downward spiral.

This is the reason why central bankers are so keen to avoid long term deflation and have taken speculative actions to address the issue. Yes, I am again talking about Quantitative Easing (QE).

Will the European Central Bank new QE package fight deflation when bond yields are already so low? We will find out. It’s another chapter of the on-going currency war if nothing else.

Given the vast amounts of money created literally from thin air and injected into the global financial system over the last seven years, this has got to increase inflation at some point right?

I am enjoying my reasonably price fuel and attractively priced groceries while it lasts.

Gary Welford is an assistant investment manager at Brewin Dolphin. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin. No director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.