Everyone likes to treat themselves to a little something now and again and one such way to do this is with some chocolate. Gone are the days when you could buy a Freddo bar with your spare change of 10p since its current price is now a huge (well, relatively) 20p.
Just to clarify; low inflation is not the same as deflation!
Deflation is caused by the supply of goods being higher than demand. We currently have a glut of crude oil in the markets. As a result the price of this commodity is very low. This then links to our energy bills being lower and it's also cheaper to fill up your car with petrol at the pump. This is also know as a positive supply shock as markets are able to provide goods to consumers at lower prices.
People are also more reluctant to spend because low inflation increases the real burden of debts i.e. the cost of repayments gets higher. This is because the amount that is needed to be paid is fixed (regardless of the rate of inflation) whereas the earnings of the those in debt may actually decrease.
Right now in the UK we are experiencing very low inflation, the lowest levels seen in decades. The possibility of sinking into deflation, i.e. negative rates of inflation, is very real.
The rate of inflation in the UK is now 0.3%, one of the lowest levels it has ever been at. After reading this week's issue of the Economist I felt there were some further key points which would be useful to add.
Risk of further deflation is also present, coming from a large (economic) slowdown in China etc (Monetary) policymakers have hardly any room for manoeuvre i.e. in many countries the interest rate cannot be reduced further.
It is also suggested that it is best to set a completely new target - aiming for a particular level of nominal GDP. GDP is the total value of spending in an economy and the 'nominal' part means that it is adjusted for inflation. Therefore we would not be so affected by price shocks.
P.S: This was my first attempt at writing a blog post. My friend Anna Stansbury spent time to help me improve - hence the changes I made. A special 'Thank you' to you Anna for being so supportive!