Belfast Telegraph

Great news but you can have just too much of a good thing

By Esmond Birnie

The latest figures from the Office for National Statistics (ONS) show the Consumer Price Index fell to a record low of 0.5% in December with every possibility that it may fall further.

If this trend continues, the UK may even be moving towards the situation in some parts of Europe and the eurozone where price levels actually fall - that's deflation. The last time deflation was persistent in the Western world was between the two world wars.

The big drivers in the inflation decline are continued falls in petrol and diesel prices and the fact that previous big increases in gas and electricity prices in Great Britain have now worked their way out of the statistics and in some respects a lower rate of price increases is good for Northern Ireland households.

First, because it makes it more likely that they will experience growth in real wages and living standards during 2015. And second, it reduces the pressure on the Bank of England to raise its interest rates from the current low level of 0.5%. It's also good for Northern Ireland as lower fuel prices reduce into the delivery costs of food and for manufacturers and exporters, it reduce the cost of getting goods to market.

Falling oil prices mean that the average Northern Ireland motorist will save around £140 this year and at least some of that saving will be spent elsewhere, boosting other parts of the economy.

Danny Alexander, chief secretary to the Treasury, said lower inflation was "like a giant tax cut for the economy".

At the same time, at the risk of proving economists can extract a cloud from every silver lining, it is possible to have too much of a good thing. Deflation means consumers may postpone purchases as they wait for lower prices to fall further. So, a little inflation encourages you to buy sooner.

Regardless, the Northern Ireland economy will continue to recover but growth in 2015 is likely to be less than 2014.

Belfast Telegraph


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