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Deflation

Debt management company Gregory Pennington welcomes the recent fall in inflation – in particular, the indication that some of the financial pressures on struggling borrowers are starting

Welcoming the recent fall in inflation, debt management company Gregory Pennington highlighted the significance of this drop to people struggling to manage their debts.

In October, the CPI (Consumer Price Index) measure fell from 5.2% to 4.5% – the largest month-on-month fall in 16 years. Having said that, the reading of 5.2% was the highest reading in 16 years, so even a reduction of 0.7% falls far short of returning inflation to a ‘normal’ level.

“Remember the Bank of England’s target for CPI inflation is just 2%,” said a spokesperson for the debt management company. “At 4.5%, today’s rate of inflation still means prices are rising more than twice as fast as the Bank would like – this reduction simply means that the speed with which things are getting more expensive is slowing.

“More to the point, CPI has been over the Bank of England’s 2% target ever since October 2007, so today’s consumers are still dealing with the cumulative impact of a full year of high inflation. And the timing makes that elevated cost of living particularly dangerous: today’s consumers are also dealing with record levels of personal debt, as well as rising unemployment.”

As a result, there are many people finding it hard to manage their debts: trying to stretch a shrinking budget further each month. “For anyone in that position, any decrease in inflation can’t come fast enough. They’ll be relieved to see some expenses – such as petrol – coming down, but many other things are still far higher than they were a year ago. A recent article in The Guardian, for example, reported that a basket of 24 staple items in the UK’s biggest three supermarkets now costs 17.8% more than it did last November.”

Looking forward to next year, it seems the Bank of England is expecting inflation to eventually drop below its 2% target, and perhaps as low as 1%. “This is good news for two reasons,” said the spokesperson for the debt management company. “Not just because it’ll mean prices are (relatively) coming down, but also because it could allow the Bank to cut the base rate even further.

“Clearly, a lower base rate could help many people currently struggling with their finances. People on tracker mortgages will see the most immediate benefit – many of them have already seen their mortgage payments drop by hundreds of pounds compared with July, when the base rate stood at 5.75%.”

Nonetheless, too little inflation can be as dangerous as too much – and we’re now facing the possibility of deflation in 2009. While economists agree that a short stint of deflation would not be a problem, any sustained period of shrinking prices could seriously damage the economy.

Deflation means a decrease in the price of property, shares and goods of all kinds. People therefore wait to buy expensive items, as it only makes sense to wait until the price comes down. Falling demand means companies sell less and are forced to reduce their workforce.

“It’s clear the Bank of England has a delicate balancing act ahead of it: when it comes to normal people managing their debts, deflation could be as big a danger as high inflation.”

Via EPR Network
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