Can The UK Avoid Deflation?

Quite interesting numbers out from the ONS this morning. UK inflation has fallen from 1.6% in August to 1.1% in September. As we said earlier this year, it was always going to be hard to keep inflation in positive territory due to the energy price spike of last year. From October onwards these pressures will fall away.

In addition, the VAT rise in January will be another small boost to inflationary expectations. So all in all it looks on the one hand as if actual CPI deflation will be avoided; in the RPI world we have had deflation for most of the year.

However just look at the trend in the graph below (last month’s ONS figures), it shows inflation falling away in a deep trend. Trends change, but this month this one has become more entrenched not less. We only need 2 more months of this trend to end up in CPI deflation.

So what does this all tell us?

1 - There is no sign at all of any real inflationary pressures, people betting on inflation for next year are way out. The Japan style deflationary scenario lay ahead of us with very low interest rates for years to come. Bad for saving, good for borrowing.

2- The Bank of England will probably increase the level of Quantitative Easing in November having seen these figures as it will be worried about scenario one taking hold - horse, stable door situation for them.

3 - The Pound will continue to drop due to 2. If you are making investments, try some denominated in Euro’s or Aussie Dollars.

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