Beware deflation: inflation has fallen to 1.7%

Although pay and price rises are finally converging, this isn't necessarily good news.

by Rachel Savage
Last Updated: 25 Mar 2014

Inflation fell to 1.7% in February from 1.9% in January, the second month in a row it has lingered below the Bank of England’s target rate of 2% and the lowest level since October 2009.

It’s more vindication for Bank governor Mark Carney’s harping on about low interest rates and a welcome sight for workers with pay packets that have been lagging inflation for several years now, but, as anyone with one eye on Japan since the 1980s will agree, not necessarily a sign of an economy in rude health.

Petrol, energy and clothes prices fell, while furniture and entertainment partially offset the downward trend. The slowing price rises, converging with a long-overdue uptick in wages (seen here in this handy graph from FT economics editor Chris Giles), will definitely help out people who have been feeling a squeeze on living standards (soz Ed Miliband…).

However, slowing inflation can set off a downward spiral into deflation and economic stagnation a la Japan, as consumers hold off purchases while they wait for prices to fall further. It’s definitely not looking great for the Eurozone at the moment, where inflation has been dithering below 1% for the last five months – if that was the case in the UK, Carney would have to pen monthly letters to the government explaining himself.

David Cameron might want to think twice, then, before continuing to chirrup about falling inflation providing ‘stability and security’…

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