Negative Inflation

More economic news this morning: inflation has gone negative. What does this mean?

It means that the UK’s Consumer Price Index (CPI), a collection of prices of goods the “average consumer” will buy, has fallen over the last year, since September 2014. As the BBC point out, the ONS (Office for National Statistics, who collect and publish the CPI) attribute this fall to smaller than normal increases in the prices of clothing, and falls in petrol prices: two goods we tend to buy quite often. Perhaps also importantly: clothes and oil, by and large, are not produced in the UK and are things we import.

Here’s UK inflation since 1955:

Negative inflation is incredibly rare: a short spell around 1960, and the current spell.

What does this all mean? Possibly quite little; the UK exited the 1960 deflation (negative inflation) spell quite quickly.¬†However, inflation is generally associated with a growing economy: growing aggregate demand and an aggregate supply unable to keep pace. If this is so, then it suggests the current economic recovery is weaker than perhaps we might think. On the other hand, if the primary reasons for negative inflation are from abroad, then this is arguably good news: the economy (hence our incomes) is growing, and prices aren’t rising – this should mean we all feel that bit better off, since we have more money to spend on things.