Deflation has come out of hiding! A Google search would no doubt bring up millions of links now.
Mqurice
To: jim black who wrote (48888) 4/21/2009 5:25:07 PM
From: elmatador of 48958
Deflation: reasons to be cheerful and reasons to be fearful
Britain's economy entered deflation for the first time since Harold Macmillan was prime minister. What is deflation, and is it all bad news? Harry Wallop explains
By Harry Wallop, Consumer Affairs Editor
Last Updated: 2:51PM BST 21 Apr 2009
Four reasons to be cheerful about deflation:
1. Deflation simply means that the price of goods and services, on average, have fallen compared to a year ago. A litre of petrol costs significantly less, so too does a pair of shoes. This is clearly good for hard-pressed consumers.
Deflation: What is it?
UK staves off deflation as weak pound pushes up prices
Economy to fall into deflation for first time since 1960
Workers' take-home pay reached new low rate of growth2. As a result, someone's salary – even if it is frozen – is worth more than a year ago. A consumer, with £100 in his pocket, should be able to buy more goods than a year before. Deflation causes wages to rise in real terms, if not in nominal terms.
3. It causes interest rates to remain low. The policy response to deflation is to cut interest rates, in an attempt to encourage spending and get inflation back to the Government's target of 2 per cent. This is one of the reasons we have the lowest interest rates in history, at just 0.5 per cent. Low interest rates are good news for any borrower, especially those people on tracker rate mortgages.
4. Deflation protects savings. A saver with £10,000 deposited in an account paying even a miserly rate of just 1 per cent will find their savings are worth more at the end of the year, than at the beginning. That's because during the year the value of assets – be it a loaf of bread or a house – will have fallen in the meantime. A £10,000 saved up as a deposit for a house should allow you to buy a bigger property
Four reasons to be fearful about deflation:
1. It causes consumers and businesses to feel concerned about spending. Why buy that £400 television this week when you are confident it will be cut in price to £350 next month? The same applies to businesses – why invest in new machinery, or software when you think it will fall in price? Deflation can, if it becomes entrenched, cause the whole economy to grind to a halt.
2. Deflation causes wage cuts. Employers can argue that they do not need to give their staff a pay rise, because their staff can buy more goods with the same salary. Many companies are freezing pay and started cutting wages in some cases.
3. In theory, falling wages should not matter if the price of goods and services fall as well. But in practice it is very damaging psychologically. People paid £30,000 one year do not like being paid £29,000 the following year even if they can buy the same amount of goods. Everyone feels less wealthy, especially home owners whose main asset is falling in price. And when they feel less wealthy, they spend less, causing a vicious downward spiral in the economy.
4. Deflation causes the value of people's debts to mount. A £100,000 mortgage might cost £4,000 to service each year, but the value of the house could fall by £4,000 or more – a dispiriting experience, but you will still need to keep on servicing the debt.
telegraph.co.uk |
