The latest set of data from the UK’s Office for National Statistics shows that prices in February, as determined by the Consumer Price Index (CPI), have remained unchanged from where they stood twelve months previously. Consequently, by this measure, inflation in the UK has fallen to zero and is the lowest reading (on this scale) since its inception in 1988. The value shows a decline in UK consumer prices from the 0.3% inflation level (in January) and surpassed analyst’s predictions that it would hover above zero, coming in at 0.1%.
The CPI figure became the main indicator of UK inflation back in 2010, replacing the Retail Price Index model. The RPI figure included elements due to housing and mortgage costs and showed deflation for much of 2009, of course. The Bank of England has a target value for inflation of 2% which they believe to be a healthy level to ensure the growth (in part) of the UK economy.
Japan has experienced more than 20 years of deflation or low inflation and this has been blamed for stifling domestic demand since consumers delay making significant purchases for as long as possible against the knowledge that the goods they need will be cheaper at a future date. It has been suggested that deflation in the Eurozone and British economies could also trigger a slump in consumer spending on this basis, but this is to misunderstand a cultural difference between Japanese and Europeans. Japanese citizens tend to save a larger proportion of their income than their European of American counterparts and have lower personal debt levels. It is unlikely that many Europeans or Americans will have the patience to wait to benefit from falling prices since “instant gratification” through the use of personal credit (credit cards, loans and overdrafts) is deeply ingrained in the psyche of most Western consumers. As a consequence, most people will taking declining prices in their stride – particularly as the margins are slight and well within the range of interest rates spreads on offer for credit cards (or store cards). If inflation rates are at or below zero, wage rises will mean that consumers have more disposable income which could spur demand rather than suppress it.