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Has Goldilocks gone for good?

Stephanie Flanders | 15:09 UK time, Tuesday, 17 February 2009

Should we be more scared of deflation - or of inflation? Anyone who's been living on planet Earth the past few weeks will choose deflation.

It's fear of falling prices that's driving policy by the Bank of England and the Federal Reserve right now. And rightly so. We saw what happened in Japan and we don't want it here, thank you very much.

The CPI (Consumer Prices Index) measure of inflation fell to 3% last month, and the Bank of England now expects it to fall close to zero by the middle of next year. But they don't rule out the possibility of a negative CPI. And they see little chance of CPI above 2% before 2012.


The City takes a slightly different view. If you look at market measures of inflation expectations, investors seem to expect moderate deflation in the next year or so, but significant inflation after that - of the order of 3 to 4%.

But as usual, those market expectations hide a lot of disagreement. And right now, the sheer range of views on the inflation/deflation spectrum is wider than anyone can remember.

There are those who fear a Japan scenario - a decade of self-reinforcing deflation. But there are also those who think that high inflation - even hyper-inflation - is not very far off.

That's because the more successful the central banks are in preventing deflation, and in persuading us all that prices are set to rise, the greater the chance of excessive price growth down the road.

The middling, "base-case", scenario built into most city economists' economic forecasts is what the bond market is reflecting: two years of low inflation, possibly mild deflation, with a moderate uptick in inflation after that.

But then, the base-case scenario a year ago was for a modest slowdown in the advanced economies, and consistent growth everywhere else. Look how that turned out.

I suspect that, in their heart of hearts, many city folk think we are living in a more binary world - that it will be bad deflation, or high inflation (maybe even one followed quickly by the other).

What seems strangely unlikely is a "just right" outcome in between. The Goldilocks economy really has gone for good.

That poses a challenge to policy makers and all of us. But spare a thought, too, for the fund managers charged with investing our fast-diminishing pension pots.

After all, if you think that deflation is the big danger, the traditional advice would be to pile into cash and bonds. If you think that inflation is enemy number one, then history would suggest that shares and gold are a safer bet.

But what do you do if you think that there's a roughly 50% chance of each?

It sounds like one of those peculiarly unhelpful weather forecasts. But that may well be the world we're in.


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  • Comment number 1.

    I'll stick with those forecasts of a negative RPI but positive CPI.

    Price inflation is likely to fall until mid-2009 - RPI will go negative and CPI just above zero.

    By the end of 2009, CPI will be around 2% and RPI will be around zero.

    I'll need to see what sterling does before I change the above. The contraction in the Japanese and German economies is very worrying, as they are shrinking faster than expected; and Britain won't be far behind. To counter the world deflation, the BoE will try this QE business, the results of which will be interesting to say the least.......

  • Comment number 2.

    Surely if deflation leads to cheaper prices, making everything more affordable, that's a good thing right?

    I'd rather have falling prices than hyperinflation.

  • Comment number 3.

    My guess is as follows for CPI:

    2009 - 2 per cent (+- 1 per cent)
    2010 - 1 per cent (+- 2 per cent)
    2011 + 2 per cent (+- 3 per cent)
    2012 + 5 per cent (+- 6 per cent)

    also interest rates

    2009 1 per cent (+- 1 per cent)
    2010 3 per cent (+- 1 per cent)
    2011 4 per cent (- 1, + 2 per cent)
    2012 5 per cent (- 1, + 7 per cent)

    It all a bit depends... The BoE has shown that it and its present staff are incompetent so heaven knows what they will do. There will have to be an election by May 2010 too.

    However we need an inflation index that INCLUDES house prices - if we do not get one the whole system is unstable and really not worth guessing! It is a bit like sticking that tail on the donkey!

  • Comment number 4.

    Very interesting and a useful insight. If we look a bit further out, this "schizophrenic forecasting" resolves itself into a consistent prediction of short-term deflation and long-term inflation.

    With a bit of thought, this gives a clear indication for public policy: a bigger fiscal boost now, paid for by pre-announced tax increases in a few years time.

    This is strongly supported by behavioural economic research and in particular the concept of hyperbolic discounting. You can see the details here:

  • Comment number 5.

    The fear of deflation is primarily all about those who are in debt.

    So much of what we buy as discretionary items has been deflating for years ... but they still get bought. Computers, digital cameras, CDs, furniture, TVs, most electronics and to a degree cars - have been getting cheaper/better for the same money for ages.

    No the fear is that deflation will not allow inflation to clear part of the exorbitant debts we've built up.

    The BOE does need to calm down a bit and pause for a few months to see what effect their measure will have - otherwise they'll have a real 70's style inflation problem with 70's style interest rates (15% anyone)

  • Comment number 6.

    "But what do you do if you think that there's a roughly 50% chance of each?"

    Boy you're 6 months behind.

    You buy low, sell high. Or have I got that the wrong way round?

    Bonds are already high, stocks are already low and gold is off on another bubble already.

    Allocate a percentage of your portfolio to each sector; Bonds, property, stocks, commodities, cash. Then sell the ones which are at the top of the bubble. Buy the ones which have just burst.

    Does anyone really have only one asset class in their portfolio these days?

  • Comment number 7.

    I know just the sort of weather forecast you mean, and it's a very good comparison. "Scattered, and becoming increasing mixed".

  • Comment number 8.

    2. scotbot wrote:

    "...if deflation leads to cheaper prices, making everything more affordable, that's a good thing right?"

    Not necessarily. If people assume prices have further to fall, they just put off consuming, ie buying things. That lack of demand causes more firms to lay off more staff, which reduces confidence generally, further reinforcing the desire to consume (buy) less. Result? Lower aggregate demand, higher unemployment than is required to get the economy back to equilibrium.

    Once deflation is established, it's very hard to break it, as monetary levers just don't work. Hence "a bit" of inflation is every central bank's target, so as to give them a cushion against deflation.

    I agree that "a bit" of deflation is probably better than hyper inflation, though.

  • Comment number 9.

    There are two things you need to know Stepahnie.

    First, Goldilocks got eaten by Daddy Bear who did not live happily ever after. This is not in the story as it would upset the kiddies.

    Secondly, we always have weather. Weather has no moral content: it just is.

    As you imply, what use are forecasts?

    The issue is given stability we can expect a certain amount of deflation followed on by a certain amount of inflation. This is written into the processes currently being undertaken and the market reflects that.

    However, what else is out there that could go pear-shaped? A very great deal and one would be foolish to make definitive statements. I feel that slowly a level platform is begining to build underneath the economy but is it a floor, a mezzanine, a landing or just another step? Your comments on Today this morning about the Baltic Dry Index rang a clear bell with me.

    I have concluded that one has to remain cautiousl. Although the sky will not fall on our heads, something else might, or, it might not.

  • Comment number 10.

    Mandy's speech in NEW YORK includes.

    "The end of the recession simply cannot be forecast. The government cannot yet calculate the true scale of the banking losses, and there are no manuals, blueprints or precedents to dictate what to do."

    Meaning we're in the s**t big time,and we haven't a clue what to do.

  • Comment number 11.

    I doubt very much it's gone for good - I'd expect it to be back, yet again, within three decades. It's delightful how irrational humans can be particularly en masse. History always repeats, merely in a slightly different manner. For an amusing glimpse of mankind's gullibilty have a look at "Extraordinary Popular Delusions and the Madness of Crowds", published in 1841 and entirely public domain:

  • Comment number 12.

    very interesting

    Are the alternatives you give top and bottom of the models that each uses? Or do they use use different models and therefore have relatively different built in discrepancies?

    What is coming off the treasury model?

    Does it also mean the "floor" should happen in about 18 months? Does that apply to the housing market?

    What happens if the East defaults on its debt?

    What happens if our own population defaults on its debt at levels beyond those expected?

    Surely we are still in the positive feedback spiral of descent and thus what are these economists actually suggesting is going to bring everything back from the brink?

    I guess what I'm trying to ask is, how "firm" are many of the assumptions made or are these people simply grasping in the dark in the hope that we can paint a better picture?

  • Comment number 13.

    One of the telling features of this worldwide economic depression is that no one is safe. Countries like the UK which have lived beyond their means for years are being hit very hard, but so too are the large manufacturing exporting countries such as Japan and Germany, which have seen their markets dry up. At the micro level, it is innocent savers who are being hit hard whilst possibly irresponsible borrowers are being rewarded with very low interest rates.

    First, Gordon Brown needs to accept his (large) share of responsibility for guiding the UK into these stormy waters. Yes, it is a global depression, but there are many things he could have done to prepare the country better. However, we, and the rest of the world, are where we are and sensible things must be done to get us out of the mire. Brown is rightly criticised for making plenty of announcements which have not been properly thought out and simply wilt before achieving anything. Brown seems to be driven by spin and he avoids substance at every opportunity. He seems to be wedded to the desire to re-inflate the bubble that caused the mayhem in the first place.

    This is a time for a great leader to emerge and for some great scholars to come forward with an acceptable route map to the future.

    It seems to me that we have an opportunity to re-balance the UK economy, encouraging greater self-sufficiency (but not through protectionist measures) and less reliance on retail therapy. Having an independent currency should be a huge benefit as we seek to encourage adding value within the UK. Support should not be given to the failed and over-capacity activities of the past (eg car manufacturers) unless it is simply to ease their transition to a smaller future.

    Meanwhile the Government should be providing huge support and encouragement to infrastructure investment projects which will provide the country with the foundations on which the economy can grow and also to green projects which can help the environment and provide the foundations for the future. On a slightly longer term path, significant support should be given to practical R&D

    The Brown Government seems to be incapable of seeing or acting in the country's interest. Surely Labour MPs can see the damage the PM is doing. It is up to you, Labour MPs, to call a halt on the damage and force a vote of no confidence in Crash Gordon. Unlike turkeys which can never have a reason to vote for Christmas, Labour MPs should have a conscience about the welfare of the country. They owe it to their constituents to force a general election, perhaps even being re-elected as independent MPs as a result.

  • Comment number 14.

    I think we are heading for a perfect storm - rapidly falling demand AND inflation gathering pace at a gathering and real rate (real as opposed to oil price/house price driven as seen on and off in recent years).
    The inflation pressures will come from the weakness in sterling, which in turn comes from the markets view that GB and TB have wrecked the UK economy.

    I thinks there is about a 100% chance that things are going to get much, much worse before any chance of a recovery.
    Goldilocks economy?
    More like Micky Mouse economy I think!

  • Comment number 15.

    There's been deflation for years and years, albeit off-set by inflation in other areas of the economy. If you bought a computer back in 2000 (as I did), it would set you back about a grand or so. If you bought a replacement in 2008 (as I did), it would set you back about half that (and it'd be a better computer). That's deflation.
    The risk isn't deflation, it's inflation, which will start to surge at the first sight of recovery, especially if the BoE carries on with its insane policies.

  • Comment number 16.

    I agree with "true-liberal" - a bit in each asset class and watch keenly to see which trends emerge so that profit-taking can be exercised selectively as each bubble becomes apparent, but has not yet burst.

  • Comment number 17.

    Deflation is scary but it almost seems necessary to get us back to a state of balance in our personal incomes and expenditures?

    The way inflation has been calculated in recent years was a way of hiding the true increases in the cost of living as wage increases never matched true inflation or the increases in council tax for example.

    Now the government does not know where it has been nor where it is going. It’s like a zombified chicken, not a headless chicken - they have the decency to fall over after a short while

  • Comment number 18.

    Personally, I think deflation is a concept being pushed by the government. If they do not get the deflation figures they want then they can always put house prices in the CPI to bring it way down.

    Why? Because the antidote to deflation is to print money (or QE or what every other term you want). Printing money causes inflation, but if you have deflation, then this disingenuous government can argue that it becomes a necessity.

    It gets better still, the government can use printing money to bridge the gaps in budget caused by loss of tax revenue from the financial sector. However, my guess is that whatever government we have, they will get too used to printing money and when the underlying deflation goes away, then they will keep doing it until we get hyperinflation.

  • Comment number 19.

    Good blog. I really don't think anybody can make any confident predictions at the moment. I tend to the view that inflation is inevitable with the need to make the massive global debt managable assisted by the government printing money. If I had any mad money at the moment I think I would put it into wheat futures.

  • Comment number 20.

    I dont see deflation as an issue.

    if we exported as a country it may be an issue, but we arent.

    Our exchange has dropped around 25% - 30% over the last year.

    This means, in theory, for us to buy goods from abroad, if they are the same rate, it will cost us 25% - 30% more.

    In practise, the whole of the 25% - 30% wont be passed on to us, but it products will be more expensive.

    We can see this buy car prices rising from Ford, and I expect the electrical sector to start rising.

  • Comment number 21.

    I tend to go beyond the numbers on these things and rummage around in what we know of consumer behaviour. UK consumers are not the same as consumers in Japan or indeed Germany. So unless there has been a sea-change in attitudes, the UK consumer with a 'tailwind of confidence' will tend to spend surplus cash in his pocket whereas in Japan the tendency is to save. If that holds true I would think it highly unlikely that we'll see a Japanese deflationary decade setting in here. Rather its going to be a inflationary rollacoaster sometime in 2010.

  • Comment number 22.

    At the moment we have a curious recession caused by lack of availability of credit. People and businesses want to borrow but they can't get loans. Banks are rationing capital. Savers are refusing to put their money on deposit.

    The market is very clearly signalling that higher interest rates are needed. The response of governments around the world led by our own has been lower interest rates and higher government borrowing (crowding out private borrowers). And if that doesn't work, they seem to think the answer is even lower rates and ever more government borrowing.

    Now that rates have almost reached zero, and government borrowing has reached levels that approach the tolerance of the markets, the train is fast approaching the buffers. Where they go from here is "quantitative easing" or printing money. That will hold the money supply up, but production will continue falling - and inflation will result. So my money is on the return of inflation, probably first half of 2010.

  • Comment number 23.

    Following on from angryCb #13, with whose comments I generally agree, the tax system should also be used to help the recovery.

    Instead of reducing the allowances available for the investment in manufacturing plant and machinery, a policy decision made by a numbskull, these should be increased enormously.

    The government is already committed to vast amounts of public borrowing for its own political ends. How about some public borrowing for the good of the country. How naive am I?

  • Comment number 24.

    "Significant inflation after that..."

    Retailers may have reduced prices in the busy period around Xmas - but why would they do that when stocks are low and no-one's buying anyway.

    It's not working out as Gordon expected, is it ?

  • Comment number 25.

    Yes let's have the economy that Japan had for ten years. Top class manufacturing companies and high standard of living. Toyota, Sony, Nintendo, Honda etc. etc. Bring it on!

  • Comment number 26.

    Hello Steph, first time caller......

    Surely it depends on what we mean by deflation!

    If it is the statistical representation of the cost of like for like goods over a period of months or years then bring on deflation...... I like cold hard stats, you can live by them, you can set you clocks by them...

    If though ,deflation is what a bunch of theorists want to panic and flap their chops about, then move on it ain’t a problem

    Deflation is the result of other issues in the economy – it’s the spot not the measles
    Inflation can easily run into double digits, the worst case scenario for deflation would be low single digit! It is not a runaway train
    We seem to have taken out of the equation any number of other things and are worrying that people will stop buying because they think goods will be cheaper the following month or year!!!!

    Let me remind you, in general, goods I have a choice to buy or not are always CHEAPER next month or year. We gave up thinking about the cost of things 15yrs ago. If I was worried about whether I could get something cheaper if I delayed buying:

    I’d have not bough a new TV 2yrs ago, you can always get the same spec 6 months later for less
    I’d wait until the clothes were end of line before buying
    I’d never buy a new car
    .... the list goes on.

    The exception to all this, as usual is housing – because we have convinced ourselves it is an INVESTMENT ..... and only a fool would invest in something that was going to lose money! And Banks are no fools and won’t lend money to people making band investments (there is an element of irony in this section)

    Deflation is a symptom caused by any number of things - a realigning of pricing, a reduction in the money supply, the supply of cheaper imports.....

    In this instance, with the drastic reduction of available credit, we are seeing an increase (believe it or not) in the value of real cash. You’ll find this is called DEFLATION – enjoy it while you can..... in this instance it is a welcome realignment of the Worlds finances.....

    PS – Of course, the world could have continued down the path it was heading in 2007.... consider the alternatives to a little deflation, they aren’t pretty

    (got a bit ranty there :( but you know what i meant)

  • Comment number 27.

    #8 " If people assume prices have further to fall, they just put off consuming, ie buying things."

    #5 "So much of what we buy as discretionary items has been deflating for years ... but they still get bought. Computers, digital cameras, CDs, furniture, TVs, most electronics and to a degree cars - have been getting cheaper/better for the same money for ages."

    Hmm... So which is right here? I suspect deflationary expectations don't actually have that much impact in terms of people putting off buying things. Current reduction in demand is more to do with the fear of redundancy, or difficulty in getting loans, or just a general feeling that now is a good time to reduce personal debt rather than increasing it.

    Regarding longer-term fears of high inflation, I'm not sure how that is going to happen in an economy which is likely to have extremely high unemployment and weak unions. What's the mechanism for perpetuating inflation? More likely just to see sharply reduced living standards?

  • Comment number 28.

    "Cash and bonds for deflation, shares and gold for inflation..."

    It would be interesting to see a post on this kind of subject - where the best places are for your money in each economic scenario.

    Presumably the quoted piece is because cash and bonds have a more fixed value over a longer time period, so as prices drop they are effectively worth more, whereas shares and gold as constantly revalued and will stay in line with price movements?

    Scotbot - deflation is bad because people don't spend, they wait for a cheaper price tomorrow. So GNP is hit, leading to lower growth etc etc... and all the bad things happen that come with that spiral.

  • Comment number 29.

    The food prices seem cheaper - actually, when I go shopping now. I am talking about inflation and deflation from a more practical point of view!

    It would be better if people would spend more in the shops again now.

    Yes, the living standards in the near future seem to become lower for most people. In the UK, the priorities were wrong in the past.

    How could a house make so much money within a day two years ago when the heating system was not good and the windows were bad? People were buying and selling to make money. This has come to a halt. I am glad.

    Time for a re-orientation about the society as a whole.

  • Comment number 30.

    The new question is:

    Will the MPC really control the quantitative easing process? (And resist political pressures from the government - terrified by the May 2010 elections?)

    If the MPC will really control the quantitative easing ("QE"), I am less sure about hyperinflation. High inflation is usually consequence of a political-economy dysfunction. If the government/Treasury/Brown were going to decide the intensity of the QE I think he would over do it, trying to save his May 2010 election. Now, *IF* the MPC will really control it, I'm no longer sure.

    So, how independent will the MPC be?

    That is the new question.

  • Comment number 31.

    There have been many commenting on not thinking deflation will be a probelm. If you don't think it's going to have an effect just look at the housing market.

    Can I buy a house now? Yes. Am I going to buy a house now? No, because I believe things will be cheaper in 6 months time. Even with better access to credit the housing markets would still be locked up right now.

    And deflation's worst problem is when it gets to the point where companies have to start applying pay cuts. That absolutly destroys employee moral.

  • Comment number 32.

    For what its worth, I think deflation will persist for a year or so, then hyperinflation spurred by the crash in exchange rate making all the taken for granted imported "necessities" cost more.

    In the real economy, never mind rational human beings, I haven't yet seen any slowing of retail spending (Jan figures not a surprise to me). Oxford/Regent Street still busy, my local Chinese had 3 sittings full on Valentines day evening etc. There is enormous delusion out there! What will it take to cure retail therapy?

    My portfolio is spread over cash, property, index linked NS&I (inflation hedge) and a small wager in prem bonds (no interest, but also no tax + no loss). Equities are a mugs game at the moment. Also brought forward TV purchase as prices will rise once exch rate change feeds through. As a long term hedge I would invest in a generator supplying 240v

    Yes we really are in the Brown stuff

  • Comment number 33.

    Since we have built an entire economy on buying things we don't want with money we don't have, we have to either continue the madness until we hit the wall, or accept that the change is going to be painful for many.

    If the price of things declines over time we can decide whether we need/want something now or would prefer to wait. If we wait we can get something better for the same price later, or the same thing cheaper later. The market in electronic gadgets has been like this pretty much since it first appeared. Things getting cheaper over time is not a problem.

    The problem is that inflation devalues money over time, and therefore it also devalues debt over time. Taking a £100,000 mortgage and repaying it out of a £30,000 salary involves a degree of financial sacrifice. In 10 years time paying the £100,000 mortgage out of a salary that is now £60,000 is much easier.

    In a deflationary scenario prices fall, incomes may fall, but debts do not fall. So now you're paying a £100,000 mortgage out of a £25,000 salary which hurts even more.

    The government is in debt to the tune of several hundred billion pounds. So it has a choice of either defaulting explicitly (i.e. refusing to pay), or defaulting implicitly (i.e. paying in devalued currency).

    Given the propensity of the government to spin its way out of any problem, what are the odds of the latter?

  • Comment number 34.

    Interestingly the best way to protect against both inflation and deflation at the same time and with the same instrument is with pre-1992 copper coins.

    If we see inflation the copper content holds its value. If we see deflation the money holds its value.

    Of course there are practical problems with this, namely the logistics of owning enough money in copper to make it worthwhile and the fact that melting down coins is illegal, but from a theoretical standpoint it's an interesting win-win situation.

  • Comment number 35.

    16. idabld

    I agree with you (and I think it was true liberal who made the initial point). The only thing I'd add is that you should be even more disciplined with your Buy/Sell decisions. Basically, you should "rebalance" your portfolio regularly (monthly? quarterly?). In other words, look at those asset classes where you're overweight your long term asset allocation target, and buy those you're underweight. Don't try "timing" the market for turns in asset class performance. Very few people, if any, can do this regularly. So don't bother trying!

    If you rebalance regularly, you achieve two things: first, you stick to your target allocation which ought to keep you in line with your risk target too. Second, you top slice those asset classes that are outperforming, ie you should be taking profits more than losses.

  • Comment number 36.

    Why, with the benefit of hindsight, are the myths that deflation is bad and a Goldilocks level of inflation is good still being peddled? It comes from the same school of muddled economic mumbo jumbo that applauds falling interest rates, fiscal stimuli and bailouts for bankrupt businesses. Certainly there are winners in the Goldilocks scenario but only at the expense of the less feckless.

    In the absence of a manipulated paper currency, the natural order is deflationary as we get more productive, albeit due principally to technological advance. Government excess (in practice, all government spending) and interference in free markets causes inflation. There is no problem with deflation unless your mission is to create bubbles.

    Conversely there is enormous danger in unrealistically low interest rates, unsustainable government borrowing, absurd bailout schemes and quantitative easing, all of which are inflationary. Of course this is not too dissimilar to what has been tried in Japan where, at best, it maintained some semblance of the status quo. The difference for us is that no one wants our soon to be worthless currency.

    As for CPI and RPI, leaving aside the credibility of these figures, which have been artificially depressed since their inception, it is hard to see how either can continue to fall in the face of a depreciating currency. That said, asset prices will continue to fall in real terms whilst consumer goods will fluctuate, due in large part to fire sales, and food and commodities will rise. Pick you basket appropriately and you can have any figure you like.

    Meanwhile, production will fall and bond markets will implode under the weight of government borrowing and mis-allocation of resources. We urgently need a new vision of how we want our economy to work for us, not reinforcement of the old, failed, view.

  • Comment number 37.

    A balanced view of the threats ahead, which I'm sure our economic leaders are mindful of.
    The ideal answer is moderation with a view to genuine economic growth.
    From the present situation of high volatility in any market you'd care to analyze, it will be very hard for our global economic leaders to now take the steps leading back to moderation and such growth, in concert or individually unless global leadership is the next fashion.
    Fingers crossed for Barak; Hu; etc.
    Otherwise mega-billions will vanish for no result except certainly another slap to the underprivileged. Slap = Survival.

    Did this post cost a $?


  • Comment number 38.

    As food seems to be going up which is what we buy every day, utilities have not yet gone down to pre 2008 prices, in which we saw huge rises , I am not sure that defaltion in real terms will happen. As #20 pointed out we import a large proportion of our food and the £ is worth less, so no deflation there.

    The frightening thing is that all of the things that were supposedly put in place by the government are not actually in existance or working.

    Inflation is my bet.

  • Comment number 39.

    everyone here's like totally into their economics-banter. that's koool. when it comes to the green i say buy low get high

  • Comment number 40.

    I'll bet everyone here a beer each that it will go like this:

    Deflation in general, basic produce decreasing in value slower than everything else though. As demand for foreign imports drops the price will drop too. GBP levels out. Later, GBP weakens again, but deflation continues. 2 years later UK switches to Euro.

  • Comment number 41.

    It's all conjecture anyway , a bit like the policies of the present government, try something (anything ) to see if it works, promise recovery, then claim it might be coming with the massive investment which will provide jobs in 2 - 3 years time if we're still around. Talk about non existent policies being put in place, dish out the soundbites, ignore the fact that none of your measures are working, and distract attention from this fact by concentrating on villifying the banks. Tell the unemployed there are jobs out there, then give them to immigrants. Try hard to hang on to power till the last possible minute in the hope that something will "turn up " to save Labour from the political wilderness where it belongs. Inflation ? Deflation? what does it matter ? We will have to try to ride out the storm anyway, though some of the ships will sink forever. Hopefully enough will survive to start again.

  • Comment number 42.

    For quite some time I've been making the point that the model we should be working with here is the great depression of 1873 - 1896. There are no quick fixes but one observation well worth making is if you factor in the 25 depreciation of the pound the Footsie is now sitting at 3000 rather than 4000 so stocks are cheap....especially if you got out at 6800 or so back in 2000. We've already had the huge 50 per cent bear market rally since then, but at some point the market will decide that the worst is already in the price and start being a little bit more optimistic. It will probably be when the current deflationary consensus view snaps into the received wisdom of a more hyper inflationary the infernal mixed weather outlook pointed out elsewhere in this blog.

    Anyway long may the postings on this blog be in the low tens, which is when I used to enjoy postings with Peston (700 plus now) and Robinson (400 plus). You're gorgeous Steph. Just don't get too popular!

  • Comment number 43.

    I have been wondering for some time if the conventional understanding of and the policy response to. inflation/deflation works when we have such a wide range of elements in the economy going in diiferent directions.
    Over the last few years we had asset prices, in particular property, rising rapidly, product prices, think electronic consumer goods and clothing, falling and energy very low to very high and now on the way back.
    This led to the BOE to delay decreasing interest rates by perhaps 12 months and now cuttting them too far!
    Perhaps we need to revise the algorithms used in the ecopnomists computer models?Any thoughts
    Blue cariad

  • Comment number 44.

    What a fascinating site. Not a single contribution has been removed by moderators.

    Compare this with Mr Peston's sites.

    Is Stephanie less controversial, or are contributors to Stephanie's site much more polite because she's a lady?

  • Comment number 45.

    chris911t wrote:

    Scotbot - deflation is bad because people don't spend, they wait for a cheaper price tomorrow. So GNP is hit, leading to lower growth etc etc... and all the bad things happen that come with that spiral.

    Ok, I understand the waiting-till-tomorrow bit -- I do that myself, particularly when it comes to more expensive items, eg computers, etc.

    However, is it not the case that when goods and services are cheaper, people buy more of them. That, after all, is why supermarkets have endless promotions of 2-for-1 deals: it invites the purchaser to spend even more than they would otherwise.
  • Comment number 46.

    Hi Stephanie

    Again you have hit the nail on the head in some respects. So many of your competitors in the media just churn out " deflation,deflation deflation". The worst part is that I think they actually mean disinflation!

    We look like we might get two possible outcomes. One is a slowdown and some disinflation which with the recent declines in Russia Germany and Japan looks more and more serious. However as I have posted before it is easy to over emphasise problems at this stage in the cycle and things may improve. But there is a danger of a prolonged slowdown.

    But I believe governments will throw everything at it. If this works then they will not rush to slow the economy down and we will be in danger of a prolonged burst of inflation . Cynics may spot the fact that this would help the biggest borrower in the UK which is of course the government.

    It is rare that there are only 2 outcomes or possible combinations of these two but do not despair as we do have index linked gilt edged bonds as an alternative investment.

  • Comment number 47.

    I think it's a mistake to think that a slowly weakening GBP will cause great inflation. The overriding force is still debt deflation. Food prices rising will just prolong that process and decrease demand further.

    Also don't forget that other countries in Europe who export their produce to the UK are experiencing deflation, and those who are not on the Euro are experiencing weakening currencies too. Even those on the Euro will end up with lower input costs as wages decrease, so CPI inflation won't get dramatic.

    I think what we are looking at here several years of deflation.

  • Comment number 48.


    People have been banging on about hyper inflation for some time now and look where it got them!

  • Comment number 49.

    So, deflation will result in consumers putting off purchasing will it? Would these be the same consumers that pay up to 30% APR to get something immediately rather than save for it?

  • Comment number 50.

    As a saver and a student (who'd have thought those two could mix? Granted, I've got a five-figure student loan to pay off, but that's tied to RPI and is paid off based on income so I prefer to see it as a temporary tax) it is most frustrating to see the unfairness of the interest rate cuts as an approach to unblocking the credit markets.

    I am borderline-neurotic about spending, but with such blatant disincentives to save at present I have already bought forward a laptop purchase and plan to resume my musical tuition which I gave up last year. So apparently the 'let's party like it's 2007, again' strategy is working on me...

    Negative RPI is already trouble, because that's what pay negotiations are based on, so I'm nervous for that already especially as we've further to fall. I just hope it's not too far, for everyone's sake. On a personal level I'd quite like an overcorrection on the housing market a la the early 90s so I can buy at the bottom in about three years after I graduate...

    The key here is what happens when (let's face it, it's not if) Cameron becomes PM. What a situation for Osborne to step into...

  • Comment number 51.

    #40 I'll take your bet, and match it. A beer for everyone here if you are right.

    Demand for imports isn't very elastic and the UK can't directly influence world prices for commodities or goods anyway.

    GBP is indeed leveling out, to a more reasonable level, Sterling has been way too expensive for years. This ebbs and flows over time, it's normal.

    You don't say when "later" is.... are you an economist by any chance?

    You say "and deflation continues" but we all know that the giddy days of low yuan vs high western currencies gave us artificially low prices for, let's face it, very good quality and otherwise (for us) expensive items. These will get more expensive as currencies level out. We will only get real deflation if we decide we actually preferred the agrarian way, so prices will rise for us, not fall. Recession is not the same as deflation.

    And "2 years later UK switches to Euro". The good old pound is the oldest single currency in the world, by a long way. Even the dollar is a youth in comparison. People who would flush us all down the toilet in inexperienced despair should not have their hands any where near the handle.

    I will take your bet on any timescale you wish.

  • Comment number 52.

    A few thoughts

    - We've already had a 25% devaluation of Sterling without that feeding through into inflation. Sterling is now at or below purchasing power parity against the Dollar/Euro etc. I'm not convinced there is any strong reason for it to fall that much further against those currencies, nor therefore that further devaluation will be a cause of high inflation in the medium term.

    - The money supply is contracting like mad as banks and others deleverage. This is a good thing and some form of QE is needed to balance this out. The risk in the medium term is that banks will suddenly decide that risk has reduced and will start increasing leverage again. However that should be easy enough for us to legislate against (direct control of lending ratios?).

    - Unemployment is going to be depressingly high for the next few years. It's hard to see wages being a source of inflation.

    - There has been (and still is) a huge divergence in inflation rates for assets relative to consumables. It's difficult to put them both into the same index. Probably the Government should have two separate indexes and be concerned about inflation in both. Indeed history seems to show that inflation in asset prices (ie bubbles) actually seem to be more damaging to the economy than inflation in the price of consumables. I'm not sure they've learned their lesson on that one....

  • Comment number 53.

    While I agree with #15, that goods have been getting cheaper in real terms for years, that deflation has meant that whole manufacturing sectors in the UK have died out. Take computers. if a computer is worth £1,000, then it may be worthwhile to make them here. Whereas once the price drops to £500, it probably isn't worth it to make them here. So whole factories close, leaving hundreds out of work and communities destitute. One only has to look at the effect of losing the Hoover factory in Merthyr - which used to employ over 5,000 people - to see the terrible consequences of deflation.

    Most people borrow, especially for housing, with the expectation that their income will rise over time but the level of the debt will remain the same, making it easier to repay as time goes on. Where deflation takes hold, jobs that once paid, say, £15 an hour now pay only £10 an hour or even the minimum wage. That reduction in pay is going to make the debt a whole lot harder to pay off.

    The unions? Hah! If the price and or turnover of goods falls to the point where a company can't afford its workforce at the current rate AND they can't negotiate that rate down to save the jobs, they either close down or transfer the work abroad.

    Yes, food may well be getting cheaper, "thanks" to one very large foreign owned supermarket chain which has single handedly bullied our farmers into selling their produce at ridiculously low rates and turned some of them into paupers. That's deflation at work, an unmitigated disaster. I, for one, am now buying my produce at farmers markets.

  • Comment number 54.

    Here's hoping for deflation.

  • Comment number 55.


    I'm in a binary mood - the "unusually uncertain"( BoE). Lets forget energy,food, commodities, sterling depreciation,demand etc.for moment. Let's forget the stimulus of rate cuts, VAT cuts, government works acceleration,tax cuts and tax raises and deleveraging.
    Government reconstruction of bank balance sheets - Bernanke calls it targeted credit easing....import liquidity with gilts for asset swaps, guarantee banks' issuance, capitalise banks,buy banks' and corporates' issuance ,guarantee duff assets and, then, buy gilts with IOUs and raise reserves. OK so far provided sterling holds up and government debt sustainable. So, credit lines restored but no nationalisation so wait( how long?) for banks to lend to folks still employed who want to borrow-consumption and international trade pick up. Asset prices turn up-what then? Re-leveraging, Government cleans up its balance sheet, Tax rises and search for yield, bank rates restored....what then?Smooth curve? Depends on violence/pace of rebound and elasticity of supply.

  • Comment number 56.

    How can anyone believe that the huge scale of government debt and expansion of the money supply will not lead to inflation?

    Sure, there is likely to be a time lag during which we may encounter moderate deflationary pressures, but eventually the printing presses will deliver their usual measures of inflation.

    Also, I wonder whether we have grown too used to the comfort zone of inflation rates at less than 5% in the UK. After all the money has been flushed into the system from the USA and UK, we might be experiencing the kinds of 10-20% inflation that characterised much of the 1970s. Now that would be good for debtors!

  • Comment number 57.

    52 random thought

    ''Unemployment is going to be depressingly high for the next few years. It's hard to see wages being a source of inflation''

    It doesnt work like that. Square pegs and round holes. Location location location. It is transferable skills and ageism. If things are on the up people pay for the round peg that fits the round hole. A lot of the unemployed are not going to have transferable skills or the right paperwork. The next thing is lack of trained people. A lot of apprentices have been kicked out. A lot of graduates are going to struggle to get appropriate experience which is critical. Who is going to sell a house and move location for a job with no secure future.

    No I think inflation is not far away. Deflation I am not so sure about. The supply chain has to get less efficient as the volume contracts so prices will be squeezed up. You have just been seeing stock clearance. For those hooked into debt and negative equity disposable income is slender so they will not have deferment options, they will have limited options.

  • Comment number 58.

    Deflation does not stop anyone buying anything. If it did no one would have bought any machinery for the last twenty years. That notion is a classic example of economic theory bearing no relation to what people actually do.

    Right now it makes sense to borrow and spend as if there's no tomorrow; but no, everyone is being cautious and saving.

    Economic behaviour is driven by mood, not logic.

    The Goldilocks economy may or may not have been around recently, but one thing for sure is that it has not gone 'for good'. As other posters have made clear nothing is 'for good'.

    The older I get the more it seems only young people seem to think things are for ever.

  • Comment number 59.

    54 werrington

    You economists are such a cheery bunch. Mind you if there is an option of 2 outcomes then one of two economists will always be right because you never seem to agree. I dont much care as long as the debt is digested by the system without too much generral distress or flatulance.

    3 John from

    I have noted your figures. They have as much chance of being right as anybody elses so thank you for posting. I am suspicious interest rates are due to rise in due course so you may get your wish.

  • Comment number 60.

    55 shireblogger

    Your in binary mood.

    The only problem is the economy has been in bipolar mode driven along by a fellow with the telescope to the wrong eye saying I see no ships, only hardships.

  • Comment number 61.

    oooh.... there's a lot of silly people here!

    The fact that computers, TVs, cars are always cheaper months or years later is due to the technology moving forward or efficiencies in production; the higher spec and newer generations is just as expensive as it always has been.

    Most of the 'cost' in these cases are retrospective, i.e. to cover costs of the R&D in the first place.

    The real danger of deflation applying to these goods is when demand falls to such a degree that the final price is approaching the cost to build the product... making the product itself pointless.

    Anyway... enough of that!

    What I'm interested in is how hyperinflation would affect my morgage (if I get one in the next year or so) ?

    If I were to get one and hyperinflation takes hold (and I've still got a job!) would this be a rafty move?

  • Comment number 62.

    Some of the comments in #53 just have to be responded to.

    1 Goods becoming cheaper have not CAUSED manufacturing to die out in Britain - that would be British people not being prepared to compete, aided and abetted by a welfare state that allowed them not to. The Merthyr factory did not suffer from deflation but from being unwilling to compete.
    2 There is an assumption that Trades Unions are there to 'protect' workers. They are utterly self-serving and there to protect the number of members (subscriptions) they have. (Try attending a few conferences.) The Unions' refusal to negotiate seriously about the challenge to British industry from highly skilled cheap overseas competition has been the joint biggest thing that has destroyed British industry. (The other one? - Massively incompetent, greedy, idle management.)
    3 The idea that our food is cheap is hilarious. Every EU farmer is subsidised, subsidised by our taxes. We pay all right, just not through the till. Blaming supermarkets is good fun (and yes, their anti-competitive practices should be destroyed) but it is like blaming the pushers for the drug problem.
    4 Buying produce at a Farmer's market is a good idea!

  • Comment number 63.

    no. 61

    .... sorry.....

    meant 'crafty move'

  • Comment number 64.

    With reference to 44:

    Right - that does it: 60 postings and STILL nothing removed.

    I need an answer to my question, and the only way that this will happen is if you enter into Pestonworld (banks, grrrrrr...) in a Stephanie blog.

    Might I suggest that your next title should be:


    That'll waken them up.

  • Comment number 65.

    Whether we are in deflation or inflation over the next five years may be less relevant than the level of unemployment.

    We all know the official government figures are bogus and grossly understate the real level of unemployment within the economy. The government's "job creation" schemes mask the fact that a number of areas in the UK are moving towards very high levels of local unemployment.

    The negative multiplier effect is likely to take us well above 3 million unemployed by next year. At that stage the government will be less concerned about economic solutions rather than political solutions to the problems of social unrest.

    Strangely, the media seems to have forgetten the unrest of the 1970s or the 1930s. We are only in the early phase of the depression and long-term unemployment is going to cause a great deal more unrest in the future. Rising levels of crime, stress related illnesses, family breakups are all part of the real price one pays for allowing the economy to be run into the ground by irresponsible and imprudent leaders.

    Of course, the economist tends to treat such items are "externalities".

  • Comment number 66.

    #42 thatotherguy2

    By what definition was the period 1873-1896 a depression? I believe the period saw rising productivity against a backdrop of slight monetary increase. In fact it was possibly the best example of free market capitalism in action with low government interference.

  • Comment number 67.

    I'm rather looking forward to a long period of sustained unemployment and general unrest.

    Why? The music gets better. Classic tunes erupted from the 70s, and evolved into the 80s as things improved.

    If nothing else, the current situation should hopefully cleasnse the current chart music. Nothing like a bit of hardship to inspire the poets of the day.

  • Comment number 68.

    Not much chance of deflation if my shopping experiences of these repeat purchases are anything to go by:

    OEM Printer Ink - compared to last September the price has effectively increased by 12% if I adjust my previous purchase cost by the VAT reduction.

    Tesco Fabric Conditioner - retail price increased by 36% since last summer.

    Tesco Washing Powder - retail price increased by 28% since last summer.

    Tesco Toilet Roll - retail price increased by 20% since last summer.


  • Comment number 69.

    Over 60 responses before Straightalk puts the whole matter into perspective. It's not about the difference between inflation and deflation or if the economy has had elements of both already built into it. Ultimately it's about people's lives yours mine and all the other poor soles who live on this island.

    # 60 glanafon It's more deadly than that. It's more like using the wrong pilotage to enter a port for the first time at night. The skipper (in this case the government, BoE, bankers (but then they can't see anything coming anyway but they are very sorry!) and the rest of our business captains) can see the lights but are desperately trying to fit what they see to what the pilot tells them should be there.

  • Comment number 70.

    I agree with those that have stated that we have got used to falling prices for consumer groups, and do not delay purchases for that reason.

    However, remember that deflation is a symptom of over-supply. Demand is already low, so what happens? manufacturers cut output leading to redundancies. Fewer salesmen are needed leading to yet more redundancies.

    Now this is the real viscous circle. Fewer people in work results in less demand. The fear of redundancy causes others to hold onto their savings. Many who would like to purchase on credit, cannot, even if they can afford the repayments, as the banks won't lend.

    So what does the government do, but reduce interest rates. Now a whole sector of the economy - those pensioners who saved for their retirements find their income from investments decimated, so they too stop purchasing. Those saving on mortgage interest payments are using their extra disposable income to pay off some of the capital before the rates rise again.

    Not just that, but we generate so little real wealth in this country and import so much, that we have been relying very heavily on North Sea Oil, now which is drying up, and on foreign investments and foreign holding of sterling. Well with interest rates this low sterling is being dumped, resulting in the collapse of the currency, so we don't even get the full benefit of the reduced prices due to deflation.

    The collapse was precipitated by the banking crisis but it would not had this effect if individuals and businesses did not see massive borrowing as normal.
    Their lack of solvency only became apparent when the credit dried up. The only savings of note were the pension funds which Gordon Brown systematically raided when he was chancellor.

    GEC under Arnold Weinstock was hated by the city because he never borrowed from them, he always used his cash mountain to grow the business. It was slow and unspectacular growth, but sound. If all our businesses were run like that, and all the banks run like Barclays and Lloyds (not HBOS) we would not be in this mess today, but there again we would not have had the last decade of economic boom either.

    If there is a solution it must be to take diametrically opposite approach to that taken by this government so far.

    Interest rates should be increased, not cut. Houses are overvalued anyway, they should simply be places to live, not major investments. Negative equity is not an issue, instead of handing money to the banks, the government should use the money to buy the properties where the mortgage payments are in default. They could either help pay the mortgage, take a share in the property, or buy it outright to replenish the stock of council houses.

    Decent interest rates will result in the prudent savers having extra income to spend, but more importantly, the High Street banks will be recapitalised with savings - which is as it should be. Attractive interest rates will bring back the foreign investors, and a strong pound will reduce the cost of imports making us feel wealthier and encouraging us to buy more. So it will put up the cost of exports, but we cannot compete on price with the far east anyway, labour land, transport and energy are all too expensive here, we have to offer quality and innovation. If we have the correct products they will sell.

    Instead of pumping billions into the banks, the government should have been putting money into start-up businesses offering innovative and quality products, and into improving infrastructure.

    Is it too late? well much of the money given to the banks will probably be written off, but that does not mean it is too late. However, will Gordon admit he got it spectacularly wrong? I think not somehow.

  • Comment number 71.

    BoE balance sheet expands from -7.2 % in May 2007 to 179.4 % in Oct 2008.

    All this money pumping = Inflation

    One cannot will more property into existence by printing more money tickets.

  • Comment number 72.

    minesapils # 61

    Hyperinflation = debt wiped out and savings wiped out.

    That's why government loves inflation.

  • Comment number 73.

    #70 jerrytaff

    "Instead of pumping billions into the banks, the government should have been putting money into start-up businesses offering innovative and quality products, and into improving infrastructure."

    I totally agree. I would also add a major focus upon research and training.

    In order to do that i have been calling long and hard for protectionist policies - again totally against present policy. Given our present reliance upon imported food and raw materials, our adoption of protectionist policies would not signal and end to international trade.

    Perhaps more controversially I would also consider changes to the rules regarding redundancy for those workers employed by international companies. If say a European firm - let's take BMW - wanted to lay off UK employees then the terms of their redundancy must be the same as it would be if they laid-off workers in their home market.

  • Comment number 74.

    Childermass #58

    "Deflation does not stop anyone buying anything. If it did no one would have bought any machinery for the last twenty years. That notion is a classic example of economic theory bearing no relation to what people actually do.

    Right now it makes sense to borrow and spend as if there's no tomorrow; but no, everyone is being cautious and saving."

    The difference between buying machinery and buying the discretionary items that most people have been going into debt for (holidays, a new car, redecorating the house, new sofa, clothes, clothes and more clothes, shoes by the dozen, eating out etc)
    is that machinery is usually an asset in the true sense of the word, i.e. it produces income. People who buy machinery may also go into debt but they have bought something that will produce the income to pay that debt back.

    You say people are being cautious and saving. No, they're not. They're paying down their debt. Not the same thing at all even if the cash flow looks the same. People who save aren't in any debt - they are providing for the future. Most people I know are throwing money at their debt, which is paying for past consumption. People who save and pay back debt at the same time are deluding themselves. The best returns on the market at the moment are through retiring debt.

    #62 Childermass

    "The idea that our food is cheap is hilarious. Every EU farmer is subsidised, subsidised by our taxes. We pay all right, just not through the till."

    Well, those subsidies don't seem to be enough, not for British farmers, at least. Many are being forced off their land.

    And yes, the cost of a lot of our food and grocery items is so cheap it borders on bizarre. 35p a loaf for bread (Aldi - what on earth is it made from? dust?), 22p a can of tomatoes, 12p a packet of noodles (Tesco), £3 a jar of Nescafe (Asda). £1.16 for 1.5kg of bananas (Morrisons). £8.90 for an 8kg bucket of washing powder (Costco). 23p a can of coke (any supermarket that is running a special this week). Where else exactly in the English speaking western world do you think they sell these sorts of items cheaper? As to 99p for 2 litres of milk, I'm surprised the farmers can afford even to feed thier cows for the kind of miniscule return that would finally flow down to them, let alone bother to milk them!

  • Comment number 75.

    #65 Straight Talk

    "Strangely, the media seems to have forgetten the unrest of the 1970s or the 1930s. We are only in the early phase of the depression and long-term unemployment is going to cause a great deal more unrest in the future. Rising levels of crime, stress related illnesses, family breakups are all part of the real price one pays for allowing the economy to be run into the ground by irresponsible and imprudent leaders."

    It's different now, because we have much better social welfare nowadays. A family of four with both parents out of work would get more than £400 tax free in direct cash benefits, by the time you include income support, child tax credit, child benefit, local housing allowance and council tax benefit. Then there are the freebies, like dentists, prescriptions, free glasses every year, free school meals. It all adds up. Generous benefits are the opiate of the masses. Even the interest on the mortgage is paid after 13 weeks. Already city councils are starting to take equity positions in properties where the mortgage is in arrears - York Council comes to mind - to make sure families on benefits don't lose their homes.

    This is the price of keeping civil unrest at bay, and I would think Gordon Brown is going to keep on borrowing whatever it takes to do just that.

  • Comment number 76.

    I have to say, I think the story here isn't CPI, it's RPI.

    As shown by that graph (but not even mentioned) trend would suggest that we'll be hitting negative RPI by next month - March - student loan interest rate setting month, based on RPI - I think, though I may be wrong.

    If so, the government is going to find itself between a rock and a hard place (again).

    How does it avoid deflationary pay cuts while, at the same time, it pays off students' and graduates' debts (albeit by about 0.1%) over 09/10?

    Not that I particularly care about Darling's squirming. I'm off to uni in September!

  • Comment number 77.

    #26 "I like cold hard stats, you can live by them, you can set you clocks by them..."

    Cold, hard stats ?? You want cold hard stats from this government ?? The very same that removed the house prices from the CPI ?? And has off-balance sheet debts ?? And quoted knife crime statistics unverified by the National Statistics Bureau or the Police ??

    Please (re-)read 1984 by George Orwell, especially the parts about the Ministry of Truth !!

  • Comment number 78.


    Very good point! I wonder what the new music will be too. No doubt a new popular drug will be addling the minds of our youth too. I'll be buying Pfizer stocks and expect the pharmacist shelves to be empty of cough medicine.

    #51 Tim Warwick

    :-) I think you are underestimating the power of social unrest in China and the reserves they have. China's primary concern is social unrest and unemployment. They would happily put a trillion dollars into the UK if they thought it would stimulate demand on Chinese exports, and they'd take negative returns (as evidenced by their purchases of real negative yielding US treasuries recently and other direct investments), and they can afford it.

    So what about the Yuan? China like other export countries will just experience falling demand, deflation and unemployment. The last thing in the world they will do is let their Yuan rise. Not only is that about as likely as being visited by Martians, it is insanity to even contemplate. What China MAY be able to do, after a period of some years, is exploit falling labour prices and asset prices in the West (eg: Rio Tinto) to find new cheap input sources, and that way exit their dollar coupling by using cheap failed Western countries to develop a domestic economy. You are looking at a decade though.

    In the meantime it is downhill for everyone en masse, together, as the world deleverages from its 30 year credit binge, from heights that trivialise the Great Depression.

  • Comment number 79.

    #32 "As a long term hedge I would invest in a generator supplying 240v"

    Unless your generator is attached to and/or powered by a wind turbine or a bicycle, you will actually be worse off, since you will have to pay of inflated-price oil or gas to power it !!

    You could also power it off methane but the process of producing the methane will make you the least popular chap in the whole neighbourhood !!

  • Comment number 80.

    #72 "Hyperinflation = debt wiped out and savings wiped out.

    That's why government loves inflation."

    Until they find that nobody will want to extend them any more credit and they have to pay for everything in cold hard cash !! Ask Woolies !! They found out the hard way !!

  • Comment number 81.

    #73 "If say a European firm - let's take BMW - wanted to lay off UK employees then the terms of their redundancy must be the same as it would be if they laid-off workers in their home market."

    Why should a company lay off workers in a successful market just because they lay off workers in an unsuccessful market ?? Why punish success ?? Communist central-planning economy in action ??

  • Comment number 82.

    #74 "Where else exactly in the English speaking western world do you think they sell these sorts of items cheaper?"

    That's because the entire English speaking Western world runs on debt-ridden deficit economies !! Try looking into the English speaking *Eastern* world !! The prices there are much lower and they still make profits !!

    Tesco and Carrefour are two chains that are expanding aggressively into those areas because they see their future profits generated there despite lower prices !!

  • Comment number 83.

    In your article and in all the comments above, there dose not seem to be any mention of stagflation ??

    Stagflation was a term invented in the '70s and was used to describe the nightmare of those times !! This is where income remains stagnant (or even falls) and inflation runs rampant !!

    This spectre seem about to rise again and haunt us through to the middle of the next decade !!

    I lived through it once and it was certainly not a pleasant experience and I would hate to live through it again !!

  • Comment number 84.

    #74 "You say people are being cautious and saving. No, they're not. They're paying down their debt. Not the same thing at all even if the cash flow looks the same. People who save aren't in any debt - they are providing for the future. Most people I know are throwing money at their debt, which is paying for past consumption"
    Are you saying these savers have never been in debt? Can this be backed up by facts? - please provide them or links to them.

    The main reason people go into debt is to buy a property to live in. It is seen as a saving in the long term.

  • Comment number 85.

    #62 Unions - maybe they should receive share instead of cash subscriptions.

  • Comment number 86.

    #75 dktreesea

    OK, put like that the level of benefits look high at first sight. But then I will ask you to consider if you could live on the monthly amount with a wife and 2 children to support? If, as some posters have suggested, we get rampant inflation life will become even more difficult as your benefit will not rise. You really should think about the consequences of being unemployed before mouthing off about the level.

    "benefits are the opiate of the masses." What a ridiculous Right Wing chant and like all chants does not stand up to scrutiny . How about contrasting that with the overblown salaries paid to senior management and the criminal lack of investment (in comparison with our competitors year on year) in business

  • Comment number 87.

    #82 ishkandar

    If we take the BMW situation then it is clear that the MAIN reason for sacking people in the UK was nothing to do with an 'unsuccessful market' it had more to do with the fact that it was EASIER and CHEAPER to lay off British workers than German ones.

  • Comment number 88.

    There does seem to be a couple of false arguments doing the rounds in attempt to justify QE.

    The price of technical goods falling is a direct result of innovation and competition.

    This has been identified by Moore's Law which broadly states that the amount of information that can be held on a chip for a unit cost, doubles approximately every two years.

    Capacity doubles as costs broadly stay the same; or older capacity can now be generated at half the previous cost (roughly).

    This state of technocal progession is estimated by Moore to hold good for a period of about 20 years.

    So, new feature technology initially commands a premium, with returns subsequently flattening as more competition gets into that market.

    The costs of static or old technology fall because new and improved features can now be supplied for roughly the same previous cost.

    People buying PCs Digi Cameras, TVs etc to a 5 year old spec should therefore pay appreciably less than 5 years ago, unless of course the supplier is trying to rip them off.

    Economists attempting to justify inflation on the basis of reducing tech costs are employing a false argument.

    As identified earlier in this blog, the pseudo-economist misunderstanding of what happens in the real world seems to be the basis for their nonsensical remedies.

    Furthermore whilst I am on...

    ...if CPI at 3% is within BoE target - and set to rise as soon as the next oil price and future import costs get ramped up -
    then there is no rationality in introducing future inflationary measures.

    Inflation will naturally occur as a result of the Government and MPC induced trashing of the Pound.

    QE out

  • Comment number 89.

    No. 67. gj_kingston wrote:
    "I'm rather looking forward to a long period of sustained unemployment and general unrest. Why? The music gets better. Classic tunes erupted from the 70s, and evolved into the 80s as things improved."

    Expect lyrics such as:

    "Something's going on, change is taking place;
    People smiling in the street have gone without a trace.
    Now it's on it's way, now it's almost here, I can't help saying told you so, and have a nice final day"


    "Do you cut down on beer, or the kids' new gear; it's a tough decision in a town called....."


    "I decree that life today is simply taking and not giving;
    England is mine, it owes me a living.
    Ask me why and I'll spit in your eye, ask me why and I'll spit in your eye....."


    "This place is coming like a ghost town;
    All the clubs are being closed down, too much fighting on the dancefloor.
    No more jobs to be had in this country, can't go on no more;
    All the people getting angry"


    "When it rains, it rains pennies from heaven"

  • Comment number 90.

    Re comment 4: If I have understood you right, you raise an intriguing solution to the dilemma that governments currently confront.

    Economists are telling them that higher public deficits are essential for the short-term health of the economy. They are also telling them they need a credible plan, now, for getting those deficits back down again, if they want to prevent a collapse in confidence and a run on the currency.

    But, if you cut taxes at the same time as announcing future tax rises to pay for it, quite a lot of economic theory suggests that consumers will "see through" the whole thing and simply save the proceeds of the tax cuts to pay for the higher taxes down the road. (In the trade it's known as "Ricardian Equivalence" - but you don't have to be a Ricardian to think pre-announced tax rises blunt the effectiveness of a fiscal boost).

    Your comments (and the blog you cite) suggest that behavioural economists have a way to square the circle. In effect, consumers will over-value the tax cuts and under-value the later tax rises, hyperbolic discounting will trump Ricardo, and we can all live happily ever after. You suggest this would be especially true in a world where a rise in inflation is expected to deflate some of the future debt away.

    But is that what happened in Japan? My impression was that they did have large fiscal boosts with carefully pre-announced tax rises to pay for them, and a lot of consumers saved upfront rather than acting as the behavioural economists would suggest. Clearly there was a lot of other things going on to undermine spending, but several who were there are the time have told me that Ricardian effects were quite apparent.

  • Comment number 91.

    The problem with Japan was that all they did was convert private debt to public debt, overlooking that the real problem was the ability of Japan (GDP) to service its total debt.

    This is another reason why QE will not work.

    Any increases in money circulation are and will merely serve to increase the rate of repayment of debt, as debt deflation is the prevailing trend. Ultimately this is a roundabout way of writing off private debt, which is what should be done to minimise deflation. The banks should be nationalised, if they are not already, to ensure that moral hazards from debt write offs are minimised in future by restricted credit.

    The only viable long term solution is to increase public spending, create employment and direct it into new types of renewable cheap energy. This should have the aim of providing a virtually free energy platform to provide an inflationary effect while money supply is kept tightly reigned in.

    This is precisely what Obama's team is doing, and they have the headtstart. Once they have got to the point where the direction becomes clear in the minds of the public - low cost electricity, new types of transport, new infrastructure,and optimism returns as enthusiasm for a new technological vision - the dollar will be decoupled from oil and the USD will drop. This will be achievable because trade imbalances will be by then reduced and countries like China will have already diversified.

  • Comment number 92.

    I am tired of reading the same rehash of press releases where the writers and those they interview obviously do not know what they are talking about. Everyone thinks they can be an economist. The current concern is when deflation will set in.

    Yesterday’s press release said the annual CPI inflation rate for January 2009 was 3.0% compared to 3.1% for December 2008 and the corresponding RPI inflation rates were 0.1% and 0.9%. These figures tell us nothing about what is happening to prices month after month at present as anything could have been happening to the monthly data a year ago.

    We should go to the raw data. Have they ever seen what an Index actually is? You cannot have a negative CPI.The CPI peaked at 110.3 in September 2008 and was 108.7 in January 2009. The corresponding figures for the RPI were 218.4 and 210.1. Both Indexes fell month after month during this period. The CPI is now 1.5% lower than it was in September 2008 and the RPI is 3.8% lower. Prices have been falling since September last year. At least, that’s my interpretation.

    By the way, if you see a commentator suddenly revealing that ‘we’ have not notices that prices has started falling it might be because I have written to several newspapers pointing out what the Indexes mean and show.

  • Comment number 93.

    No. 91. FrankSz

    Let's hope the US government can find a way of bridging the gap. They need to raise the necessary money through borrowing, as their cash reserves are low, and then invest the available cash into the development of the new energy technolgies you speak of. But the technology then has to be a success in the medium term, in order to generate enough cash to repay the government's borrowing. There was a programme on TV last night, which I should have paid more attention to, but it seemed to suggest that it is very difficult to find an efficient replacement for oil. I am no scientist; I don't have a clue about the probability of finding better forms of energy. We need it to happen, of course, but can it happen fast enough?

  • Comment number 94.


    I would have thought that the presence of deflation is as clear as a slap in the face.

  • Comment number 95.


    You know all this stuff I hear about finding alternatives to oil amazes me. Here we are living on a hair-thin skin surrounding a vast ball of liquid rock, floating in space innundated with such immeasurable quantities of deadly radiation that it's a miracle to me that between the hell of Earth's magma and the great microwave oven of our sky we have an ecology that somehow prevents us from being fried to a crisp instantly, and yet we are being fed the lie that we are dependent on oil for energy.

    We are dependent on oil for energy in so far as its relative scarcity makes it available for a price system to operate on. It is a twisted, sadistic irony that we are beholden to a few for oil when we have the technology to give every body on this planet their own Terrawatt powerplant if we wanted to.

    It is a question of will and direction, and if money is necessary to quantify that then so be it, but let us spend it on the right things.

  • Comment number 96.

    Sorry, about the typos in my last paragraph. It must have been the anger in me.
    Some people seem to be able to 'see' deflation. Prices have only been falling for a few months. I do not know whether this will be a long-run trend. But the data, which anyone can access, show falling prices month after month since September. If I have the time I'll look at the whole series and identify any other periods of a sustained falling index.
    Papers should show graphs of the Indexes themsleves and not just reproduce the graphs of their rate of change that were made avaialbe by ONS.

  • Comment number 97.

    62. wrote:

    ''Goods becoming cheaper have not CAUSED manufacturing to die out in Britain - that would be British people not being prepared to compete, aided and abetted by a welfare state that allowed them not to. The Merthyr factory did not suffer from deflation but from being unwilling to compete.''

    If your were to say unable to compete I would agree. Unwilling no. It is quite simple in mass manufacturing. Product tecnoloies are by and large mature, ie not cutting edge, and can be produced almost anywhere relatively easily. Whether you like it or not it is not possible to manufacture in conventional mass production in the face of substantially lower wages elsewhere. Having started on mature product technologies the next development will be to move up the technology curve to higher tech and higher value added. The west is left with trying to be more clever and more flexible, less standard mass production orientated. The movement of conventional mass manufacturing from this country can reasonably be expected to continue. I would hazard a guess you have not worked in manufacture.

  • Comment number 98.

    No. 92 NojobEconomist

    You have raised an interesting point.

    The published CPI rate is the "annual" change in the index. Therefore, the CPI index was 3% higher in January 2009 compared to January 2008.

    However, the CPI index in January 09 has actually fallen when compared to December 08, November 08, October 08, and September 08.

  • Comment number 99.

    To Mr Tweedy
    I know what the inflation rates that are commonly cited mean. My point is that they are misleading when trying understand what is happening to prices now.
    The monthly series of CPI shows only two periods when there were two consecutive months of falling CPI. Oct/Nov 1993 and June/July 1999 but there were very small and soon reversed. So a period of four months of a falling CPI is novel. Which newspaper or commentator will be the first to break this scoop. Who will actuqally print a graph of the Indexes themselves.

  • Comment number 100.


    As far as I am concerned, CPI can do what it wants. If income and employment rates are dropping like stones, real prices are going through the roof.


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