On the cusp of deflation

We shouldn’t be too surprised with the news that RPI inflation stayed just above the point at which we can call the first phase of price deflation since 1960. Sterling has fallen by 28% on a trade weighted index since the summer of 2007 and a depreciation of the exchange rate of such magnitude must show through into consumer prices despite the softness of demand in the wider economy. There are hints too that retailers have reversed the ill-judged and singularly ineffective VAT cut from 17.5% to 15% announced back in November. And we should keep in mind that some commodity prices are starting to move higher again with oil prices back above $50 a barrel and the Economist Commodity Price index for metals and foods also showing signs of renewed strength.

The media will pick up on the link between RPI inflation and the likely pattern of wage negotiations over the next six to twelve months. In truth, pay freezes and some deeper pay cuts are inevitable anyway regardless of what the official data for inflation is showing. Businesses across the country are desperate to cut overheads and salary costs are pretty much first in line. Any pay rise of between 1 and 2% if going to look pretty generous by the time we get to the summer.

I have attached a handout covering some aspects of the latest inflation data.

Handout Inflation_March_2009.doc