Professor Gary Cook is Head of Economics, Finance and Accounting at the University of Liverpool’s Management School:
“Back in April, the first episode of negative inflation (falling prices) for 55 years in the UK spooked many pundits and created a stir of concern that deflation, a sustained fall in the general level of prices, might take hold in the UK and lead to economic misery.
I wrote then in an article for `The Conversation’: “I am prepared to put my neck on the chopping block and predict that the fall in prices will be a blip, which will be reversed by the end of the year. So don’t worry, enjoy the falling prices while they last.” Imagine my sense of relief, then, at today’s news that UK inflation has turned positive again, standing at 0.1% for July!
Rising prices
The first cheer is from me! Both my neck and my professional reputation are now safe. Or are they?
The reasons why prices have risen, and the fact that they have, should cause a second cheer, in which everyone else joins in with me.
So-called core inflation, which excludes volatile items such as energy and food prices, falls in which were primarily responsible for negative inflation emerging back in April stands at 1.2%.
This reflects the recent strength of economic activity and rising earnings in the UK. Following a long period in which living standards were falling for most households, the economic news is more positive.
Increased confidence
Following years of austerity many people are becoming, and feeling, better off. Business and consumer confidence has been improving and both have been loosening their purse strings.
True, it raises the chance that interest rates may rise, as the Bank of England seeks to keep inflation under control, but that won’t happen yet and when it does happen, some time in 2016, it will be a gradual increase.
Third cheer?
Why no third cheer? Professor Gary Cook is safe. Living standards are going back up. What more could we want? In short, greater certainty about the strength of the economic recovery.
Oil prices have been falling, reflecting weak global demand. China’s growth, which has helped sustain the global economy, is faltering. Indeed, much the same may be said, to a lesser extent, about other emerging economies. The Euro zone has been in turmoil once more, undermining confidence in the ability of the parties concerned to manage effectively the Greek debt crisis.
The pound is strong, lowering the cost of our imports and making export business harder to win. Household debt, while falling remains high. Employment growth has been falling and total hours worked have seen a slight fall in recent months. There is a good chance that prices will start falling again.
Slow recovery
No-one should be unduly concerned, however. There is no more reason now than back in April to believe that a proper deflation will take hold or that a deflationary psychology will grip the minds of consumers and businesses, leading them to put off purchases due to fear and the expectation of cheaper prices tomorrow.
Five years ago, I warned that recovery would be slow. So it has proved. It is frustrating, perhaps, but not a reason for gloom.”
