Households face 'clear and present danger' if deflation persists

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Households face 'clear and present danger' if deflation persists, warns Bank chief Carney - but UK's desire for 'instant gratification' should save us

• Low inflation hands families biggest boost to their finances for a decade
• Needs for the Bank to be 'vigilant' against deflation
• The strength of sterling could 'weigh on prices here for some time'

 

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UK households could face a 'clear and present danger' if the current low levels of inflation slip in to the kind of spiralling prices behind the Great Depression in the 1930s, Bank of England governor Mark Carney warned today.

Inflation is currently at an all-time low of 0.3 per cent and is expected to turn negative soon – and remain around zero for much of the year.

If it only lasts for a few months, low inflation will mean families enjoy the biggest boost to their finances for more than a decade.

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Warning: Bank governor Mark Carney said the Bank of England must remain vigilant against sustained low inflation or deflation






The cost of goods and services is remaining stagnant or falling overall, while real post-tax income is expected to rise by 3.5 per cent this year alone. This will mean millions of families will start to feel wealthier for the first time since the economic downturn.

But Mark Carney voiced a note of caution about the danger to families if inflation remains low.

 

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Inflation is largely being pulled down by temporary situations – falling fuel prices and supermarket price wars that are dragging down the cost of groceries.


However there are other pressures that are also starting to weigh on inflation such as the strong pound and weakness in overseas economies.


These may weigh on inflation for longer, creating the needs for the Bank to be 'vigilant' against deflation spiralling, the governor warned.


Should these factors remain, the path of interest rates may need to change, he said, apparently hinting that they could rise more slowly than expected or even be cut.


In a speech in Sheffield today, the governor made clear that CPI was on track to return to its two per cent target but also highlighted the risks that it could remain stubbornly low.

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Global outlook: Inflation has been falling across the UK, US and Euro area






Mr Carney said: 'The bottom line is that there is a risk that the combination of persistently low global inflation and the strength of sterling could weigh on prices here for some time.'


One of the greatest dangers of inflation is that consumers start to believe that prices are going to fall further and so hold fire on spending until they do.
Similarly businesses put off investing because they believe prices will fall.
This situation can spiral because as prices fall, investment is curbed and unemployment will rise, which in turn will reduce income and spending.


This pattern can have the effect of 'drawing the economy into the vortex' Carney added.


However this danger is curbed by households' 'willingness and ability to delay consumption' he said.


The purchase of some items can't be delayed, such as groceries and fuel. Furthermore the desire for instant gratification constrains households' willingness to put off purchases, even if they think buying items now could cost more than if they waited.

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Warning: Deflation is starting to rise again in an increasing number of countries that target inflation rates




'The psychology of instant gratification – the tendency for all of us to discount the future heavily relative to the present – mutes the willingness of households to wait for lower prices,' he said. 'It's fair to say that thus far there's no evidence as yet of delayed gratification taking hold in the UK.'


He added that perhaps a more real danger of sustained deflation is that households would see the real value of their debt increase – a serious concern in a country such as the UK where consumers are so laden with debt.


This is because when a household takes out a mortgage or a loan, the amount owed is measured in cash terms – it is not adjusted for inflation.


But in a period of deflation where the value of money is increasing, the value of debt will increase also.


'As a result, more consumption or investment needs to be foregone to service the debt,' he said.

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Mr Carney said: 'This debt-deflation dynamic was at the core of the Great Depression and in the Japanese malaise following the collapse of asset bubbles of the 1980s.'


The governor said a fall in wages would be 'of particular concern' though there was no evidence of this in the UK where pay had picked up.


He added: 'More broadly, following the 2008 financial crisis debt deflation has been the dog that hasn't barked.


'But we shouldn't rest too easy - there are several reasons why the dog might have just been sleeping, and central banks need to be vigilant against the risk that recent low inflation stirs it from its slumber.'



Inflation has in recent months been weighed down by the tumbling oil price with a barrel of Brent crude today worth half as much as last summer.


The governor has described the falling oil price as 'unambiguously positive' and in today's speech said it was likely to boost global GDP by just under 1 per cent over the next three years, adding around 2.5 per cent to demand for UK exports.


He said the fall in inflation due to this was 'not generalised 'deflation' proper'.


Lower oil prices are expected to boost UK consumers as householders 'spend their windfall', even if they save 40p in every pound.


But the governor stressed that oil was not the only factor and additional 'disinflationary factors' included the slide in wages and prices in Europe as well as falling producer prices in China amid a glut of concrete and steel production.


'All this suggests a persistent period of inflation globally is a possibility, and could itself create a self-fulfilling fear of a bad outcome.'


Mr Carney said the strengthening of the pound over the last couple of years was 'reinforcing the disinflationary impulse from abroad, which could take a while to pass through to sterling prices in the shops'.


A stronger pound makes goods bought in weaker foreign currencies cheaper.


The governor said the 'pace and degree' of rises in interest rates over the next three years would be affected by a variety of factors including foreign inflation and the sterling exchange rate.


He said rate-setters would be likely to 'look through' one-off shocks.


But he added: 'It may be appropriate to take in to account persistent external deflationary forces arising from the combination of continued foreign low inflation and the protracted effect of sterling's strength on the prices facing UK consumers if those forces were to intensify.'

 

[hehateme82 0]

Donde esta El AK?

 

[superbeets 0]

Donde esta El AK?

No lo sé

 

[ScottL 2,145]

Donde esta El AK?

Something's not right. I'd start watching the A&E show Intervention to see if he and his family turn up. I have a feeling Akphi is going through a personal crisis right now. He definitely WANTS to be posting here, and something or someone has put a stop to it.

Hopefully I'm wrong and the Alaskan is on vacation and crashing luaus in Hawaii.