14th January 2015
The Chancellor will argue that we should “celebrate” and “not fear” news of record low inflation in a speech later today.
Yesterday, official figures confirmed that consumer prices index inflation in December fell to a joint record low of 0.5%, not seen since May 2000.
The news means that Bank of England governor Mark Carney has to pen a letter to Chancellor George Osborne, explaining why inflation has undershot its target of 2% by such a large margin.
However, it seems that no apologies are needed from Osborne’s point-of-view, as he will say, in a speech to the Royal Economic Society later today, that low price increases are good news for consumer spending power.
“We should not confuse this welcome news with the threat of damaging deflation that we see in the eurozone,” Osborne will say.
He will argue that the fall in inflation is “almost entirely driven by external factors such as the oil price”, which has more than halved since June, and is “much more welcome than in the eurozone”, where inflation is already in negative territory at -0.2%.
Osborne will say that a few months of very low or negative inflation will not pose a significant risk to the economy.
He will say that in the eurozone, the dangers of deflation are being discussed, which include “the risk of a self-reinforcing spiral where economic activity falters, consumers defer purchases as prices fall and nominal debt burdens become ever harder to manage.”
However, in the UK he will point to “rising real incomes, a recovery spreading to all parts of our economy, and family budgets that can stretch that little bit further – let’s celebrate these effects of low inflation, not fear them”.
But not everyone is so positive about the news.
Frances O’Grady, TUC general secretary, said: “0.5 per cent inflation shows how fragile the economy is, not just in the UK but also globally.
“While low inflation means we are finally seeing real wages start to rise, it will be many years before they are restored even to their pre-crisis levels. Seven years of falling real wages have undermined incomes and spending power; and the threat of slipping into deflation is very real. It’s a very dangerous time for the Chancellor to be proposing a new round of austerity, which could plunge the economy back into recession.
“We need a strong and sustainable wages recovery, built not just on falling inflation, but on higher pay settlements and more decent, full-time jobs.”