When things are tight, then the idea that prices are going to drop is good, right? Well, yes, it’s great to be able to buy things at an affordable price. Over the last year, there has been a 10.5% fall in the price of fuel and a 1.9% fall in food prices. However, money minds have long been worried about the dangers of deflation, even though cheaper fish fingers are cause for celebration by most of us.
So why? The problem with deflation is lack of demand. If shops aren’t selling anything and are forced to drop their prices as well as pay more for imports due to a weak pound, then it’s likely that they also have to cut jobs or wages. And so although the price of goods in the shops cost less, when you’re out of a job, the chances are you won’t be able to afford to buy much anyway. Which then causes more deflation.
A full recovery in the economy any time soon seems unlikely, despite millions of pounds worth of money being created to try and resolve the problem. Wages have barely risen, and jobs remain scarce across much of the UK outside of London. And the problem is not just confined to England, it’s happening across the world. For the moment, these falling prices are very welcome, and deflation could even increase consumer spending as prices fall. But if wages and prices drop too, then this isn’t good news.