Is Britain really entering a period of deflation?

A month ago the experts were predicting an era of deflation once the retail price index was published. I cast doubt then and do so now on this analysis. The danger for the British economy is inflation not deflation.

This morning's press was again full of the experts predicting a negative rate for the RPI. The guesstimates were for a fall of between 0.5 and 0.8 per cent. (It is the oldest and most comprehensive index. It excludes only some atypical households)

For the second month running the experts are wrong. The RPI registers this month an overall nil increase in prices.

Examine the inflation target set for the Bank of England. The bank is to aim for a 2 per cent rise in the Consumer Price Index. Last month it was 50% above this level but it still did not stop the commentators shouting about deflation. This month it has risen up to 3.2 per cent. It will be interesting what the Governor says in the letter he now has to write to the Chancellor.

Look at the other indices as well at the Consumer Price Increase. The All-Items RPI, excluding mortgage interest payments, rose from 2.4 to 2.5 per cent.

The core inflation rate - excluding energy, food, alcoholic and tobacco - rose for the third consecutive month up from 1.1 to 1.3 and now stand at 1.6 per cent.

The British economy is in a big enough mess without policy makers fighting the deflation dragon which shows not much sign of yet appearing on the scene. The 30 per cent collapse in sterling has still to be fully registered as an upward movement in these measurements. And the Government has embarked on a printing money policy which can only lead to ginourmous inflationary pressures.

It is inflation not deflation that is still the public enemy.

Date added: Tuesday 24th March 2009
Latest updated: Thursday 30th April 2009