Deflation fears are ‘misleading’, says Bank deputy

27th March 2015

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Fears that Britain will become stuck in a deflationary spiral of falling prices and wages are overblown, according to the deputy governor of the Bank of England.

 

Ben Broadbent (pictured) said policymakers should remain ‘watchful’ of the dangers of zero inflation and potentially negative price growth, which would mean Britain was pushed into deflation. Inflation fell to zero in February and is expected to drop into negative territory in the first half of the year.

 

However, he said the country should not ‘overstate the risks’ of low inflation or deflation, as falling oil prices had helped to keep consumer costs low and the impact was likely to be temporary.

 

‘While [low inflation] is unlikely to go on for that long, it is positive, not negative, for demand and output,’ he said in a speech he gave in London.

 

‘The fall in inflation has been driven not by the declining value of what we sell, including wages…but by a steep fall in the price of something we buy.’

 

Petrol price falls, as well as food price falls, have already fed through to spending and household confidence, said Broadbent, and last year real household consumptions rose at its fastest pace for seven years.

 

Broadbent believes that the argument that deflation was a problem as it encourages people to put off spending as they believes prices will fall further was ‘at best a partial description of the problem, at worst a bit misleading’.

 

‘Support you’re told that prices will fall over the next year but that the value of your income will remain unchanged. All else equal, the prospect of falling prices will give you an incentive to postpone a bit of consumption. At the same time, the real value of that income will prospectively have risen,’ he said.

 

Broadbent added that it would be wrong to assume income growth will continue.

 

‘Deflations have to start somewhere and there is a risk that falling prices will beget yet weaker or even negative wage growth – that today’s ‘good’ deflation will metastasise into something a good deal worse,’ he said.

 

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