What is good deflation?

It makes you wince just thinking about that horrible grating sound, much to the amusement of the unaffected.

My aunt has a similar pained reaction whenever anyone drags their fingers across a balloon, its chafing squeak leading to anguished cries for mercy.

Naturally, this a priceless activity at any family gathering until said aunt snaps, storms over and bursts the balloon with her bare hands.

To her, this is good deflation.

To everyone else, particularly Bank of England Governor, Mark Carney good deflation is slightly different.

When he has spoken on the topic in recent months, it is in the context of expecting weakening food and energy prices to lead to UK inflation figures becoming negative.

They did just that last week, registering a figure of -0.1 per cent.

But to understand good deflation, we need to appreciate what bad deflation is.

Bad is what happened in the 1930s.

Already weakened from the First World War, a sharp global economic downturn saw UK inflation plunge, dragging economic growth with it.

The last time the UK entered a period of deflation was 1960; cue references to when a loaf of bread cost five pence and a young guy called Cliff Richard was hitting the charts.

Bad deflation is when people decide to delay their purchases.

Why buy it today when it will probably be cheaper tomorrow?

As many of us know, the fall in energy and food prices have instead acted like a tax cut for consumers and has encouraged, not hindered spending.

These are the main elements causing weakness in the Consumer Price Index (CPI). It is good deflation.

0.1 per cent is not exactly a big deal.

If you were spending £100 on a typical basket of goods of services, it now costs £99.90.

Not even Ebenezer Scrooge would interrupt his day for that.

It is important to actually appreciate what the -0.1 per cent figure is saying; specifically it reflects the last twelve months to April, a period that includes oil falling sharply last summer from $114 a barrel to its current level of around $65.

As the period being captured continues to move out and past this dramatic slide, we should see a return of inflation.

The economies attracting the attention of investors at the moment are the ones making reflationary efforts via quantitative easing (QE), namely Europe and Japan.

Inflation expectations in Europe in particular have picked up recently.

This is attributable to QE and the rise in the oil price, another demonstration of its global influence on inflation and that regarding deflation there is nothing fundamentally to worry about.

Those looking closely may highlight that core inflation, the one that ignores the effects of food and energy, also weakened, from one per cent to 0.8 per cent.

Does this mean the underlying strength of demand is deteriorating? Probably not.

These figures include durable goods such as home appliances and electronics that by nature have persistently deflationary trends, i.e. their prices fall as quality improves.

Anyone who has tried to buy a big screen TV two years in a row will know this.

Sit back therefore and enjoy being alive in a period of UK economic history.

In another 55 years, economists may be looking back, marvelling at only having to pay £1.35 for a loaf of bread, wondering who this band called One Direction were and what this torturous device called a blackboard was.

Jeffrey Ball is an assistant director 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.