UK in deflation

21 April 2009 │ Edited: 27 April 2009

It is not a surprise that the official figures show the UK is in deflation. The question is whether this heralds the beginning of a prolonged period of deflationary spiral or not. I’m neither an economist nor a futurologist, so I don’t know, but to an ignoramus like me, the answer to this question seems to depend whether the economy will recover any time soon and the value of the pound.

Consumer spending looks pretty tight. Anecdotal evidence, gained from observing the increasing number of empty retail units in places like the Centre Court shopping centre in Wimbledon and the Whitgift shopping centre in Croydon, suggests that the times are not good. Shops selling non-essential goods seem to be going under quite frequently. Luxury or discretionary spending will probably remain tight, so deflation in these non-essential items and services will continue.

The costs of the necessities, like food and energy, have also come down a notch. Food prices had gone up last year and that was quite noticeable, however the situation has been reversed this year. Supermarkets seem to be targetting the price conscious customers by displaying the cheaper own brand products more prominently than they used to. My electricity and gas supplier asked me whether I wanted to fix the unit price until some time later this year. Being a cynic, I felt that this was a sure sign that the supplier thinks the prices will fall further. Such a drop will be welcomed by those whose earnings have dropped because of underemployment. Yet imported foodstuffs and energy prices are linked to the purchasing power of the pound, and if the currency goes down, inflation in these essential commodities may be the result.

Even if there are "green shoots of recovery" and the pound remains stable, the unemployment situation sets to get grimmer by the day. As I understand it, there is always a time lag between the economic recovery and recovery in employment. As long as the worst of the employment situation is not over, many more people will be cautious and thrifty. Consumer spending remains therefore weak.

So it seems that a period of deflation is likely, but how long and how serious, we will have to wait.