The UK is experiencing its first month of deflation in 55 years. Official figures highlight that prices have fallen over the last 12 months, causing the first period of deflation since 1960. It is thought that cheaper food and fuel prices have eased pressure on family finances and is the main cause behind these falling figures.
Many analysts believe that interest rates will remain at rock bottom for the rest of the year; but what will this mean for you and your business?
Cost of Living Falls
Deflation brings about a price decrease in many products; such as food, fuel and other goods. This is promising for businesses who wish to invest or expand, as the cost of doing so comes down slightly. Overall, the cost of living will see a big decline, which can help many people who are currently struggling financially. Fortunately for UK citizens, it also means that our cash goes that extra little bit further. This can have a very positive impact on families and business owners due to the amount of pennies they save.
In the coming months we can expect to see many supermarkets and online shops battling it out for customers, trumping each other with their prices. This means you may see stores across the UK challenging others with their lowest prices. Around this time, people will feel like have more money in their pockets, which will then encourage them to spend more.
Negative Economic Repercussions
Deflation does of course have negative repercussions, especially if this void in cash is not replaced by money from elsewhere. The lowering of prices means less money enters the economy and therefore the financial situation becomes worse for the country overall. If deflation does indeed continue to drop for a number of years, it can have almost everlasting effects on the economy.
Investment can slow down as businesses wait for cheaper prices around the corner and less money will enter the economy over time.
Normal Play Will Resume
Mark Carney, Governor of the Bank of England, has said that this is a temporary situation and we should “enjoy it while it lasts.” Before we realise it, prices will rocket again and normal play will resume. He believes that retuning inflation to the target of 2% will take gradual increases in rates of interest over the next 2-3 years.