As the Guardian has reported:
Official figures showed the annual growth rate in consumer prices slowed to 0.5% in May as oil prices tumbled, the lowest annual rate since the Brexit vote in June 2016.
ONS deputy national statistician for economic statistics Jonathan Athow said:
The growth in consumer prices again slowed to the lowest annual rate in four years. The cost of games and toys fell back from last month's rises, while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months.
Outside these areas, we are seeing few significant changes to the prices in the shops.
For the second day in a row we have the Office for National Statistics issuing almost meaningful comment on what is really happening in the economy right now.
The micro-scale comment provided is at best just described as a distraction: this minutiae is clearly not what people are concerned about at this moment, so why is the ONS sticking to the old narrative? Instead what people are concerned about is the trend in inflation and what the consequences of that might be.
The trend is downward.
I think it is going to remain downward.
That is because there is a shortage of supply in some parts of the economy right now. But more importantly, there is an even bigger shortage of demand at present. Those people with money at present are less willing to spend it; savings are rising. And those without money have not got many options available to them to spend. The net effect is that demand is weak. The consequence is a likelihood of falling prices.
And falling prices matter. That is for three reasons. First, falling prices if they turn into falling wages (and they often do) mean that the real cost of serving debts increases. So, proportionately more is spent on fixed costs like mortgages, paying off loans, etc.
Second, rents also increase in proportion to incomes in deflationary situations as these too tend to be fixed and do not see downward adjustment.
These two issues increase the impact of inequality. The owners of debt and property see their incomes protected, but those paying suffer increased stress.
Third, deflation tends to compound itself. Once people think prices are falling they defer spending in the hope that things will be cheaper in the future. A downward spiral is created.
In that case the ONS had a duty to make clear what its data might imply in my opinion, and that is economic difficulty.
How to address that? The answer is relatively straightforward. It is that when consumer demand is weak (and that may be a good thing for green reasons) then what should take the place of activity intended to meet that demand is investment activity intended to create the green transition that we require - or a Green New Deal.
This can be done when there is deflation in the offing because what deflation signals is the availability of resources available for other uses - and that is the signal that government needs to intervene to deliver that stimulus programme that is based on investment and not consumption.
Indeed, it must do this or as noted the economy spirals downward, and I do not think we are in any state to manage the consequences of that in social terms.
So deflation matters. We need to worry about it. And the ONS needs to say why.
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I’m broadly in agreement that in the short-term deflation is the key risk. However, as you rightly point out deflation has major negative consequences. Not least for governments as their debts rise in real terms. Whilst this shouldn’t really matter, the perception is that it does matter, and as a result governments will do whatever it takes to come out of deflation.
It is normally quite difficult for governments to implement policies that create galloping inflation. However, a period of deflation does provide the incentive to encourage this. In the medium term (2-5 years) I wouldn’t be surprised if we start to see inflationary pressures. This doesn’t mean that governments don’t need to implement policies to counter deflationary pressures; however, it does mean that they need to have a much better understanding on the likely inflationary aspects of these policies.
I see this as one of the major challenges for MMT. It may be possible to convince people that government policies should focus on controlling inflation rather than managed debt, however, without a robust framework in place to help manage inflation we run the risk of letting loose uncontrolled policies on the whim of whoever is in charge. I see parallels with the current COVID-19 crisis. Everyone is in agreement that the key to control is to keep ‘R’ below 1. However, no-one really knows that the current value of ‘R’ is nor the effect on any individual action on lowering ‘R’.
How do you see those inflationary pressures arising?
Inflationary pressures will come from the government putting in place lots of stimulus packages in a piecemeal way without understanding the likely inflationary aspects of them. It is a bit like steering an oil tanker – once you start to see the effects you have almost certainly put in too much stimulus.
You do realise the scale of the crisis that we are facing?
I am in discussion with about 15 economists as I type – the estimate is centring on 5 to 6 million unemployed in the UK
And stimulus is going to be big enough to tackle that and create inflation?
I have been here before…….. except I was in Japan. In the 90s there was concern about deflation so ZIRP (zero interest rate policy) and QE were introduced. All we talked about was “when would inflation kick-in?” (yes, I was one of them, then). 25 years later we are still waiting.
There are all sorts of risks in life but we need to focus in bigger, nearer risks. Smaller, more distant risks can be dealt with in due course.
I rate the risk of inflation as the square toot of diddly squat
A concern for many will be that the cost of food is rising.
Agreed….
I think a wise man once said that worrying about inflation right now when stimulus is needed is like worrying that the fire brigade will ruin your carpets when your house is burning down….
Precisely