Deflation

lalman

I think the news of deflation is starting to get louder and louder. With the recent drops in petrol prices (Shale revolution and OPEC over supply), commodities (due to a slow down in china) and Europe falling apart... is anyone else worried that the UK will be dragged into this mess by Europe?

It feels to me that we have a slightly more robust recovery but not so robust that we can stamp on it yet... with a lot still driven by consumer spending.

When I did my undergraduate degree I remember my lecturer banging on about how bad deflation was and how hard it is to get out of it... this is doubly more disastrous in a highly leveraged financial system (i.e. Europe, USA and us)...

Am I being to gloomy?

Bantex_2

It would solve the cost of living crisis we keep getting told about.

andyroberts1967

As a civil servant who's not had a sniff of a pay rise for over 4 years, I welcome a spell of deflation. At least it would give our incomes a chance to catch up, if prices are falling for a while. I'm sick of having to stretch money further and further every month. Bring the deflation on!

michaels

andyroberts1967 wrote: »

As a civil servant who's not had a sniff of a pay rise for over 4 years, I welcome a spell of deflation. At least it would give our incomes a chance to catch up, if prices are falling for a while. I'm sick of having to stretch money further and further every month. Bring the deflation on!

No progession in your pay band then?

With deflation tax receipts will fall (VAT obviously directly but incomes are likely to fall too as employers can no longer afford the salaries of each workers output is worth less) so I would guess govt employees pay would not be exempt either, sorry.

It seems unclear if the UK and US can carry on growing witout the rest of the world doing so. I am more hopeful for the US simply because they have shale driven energy price decreases and a much less (proportionately) open economy.

Generali

lalman wrote: »

I think the news of deflation is starting to get louder and louder. With the recent drops in petrol prices (Shale revolution and OPEC over supply), commodities (due to a slow down in china) and Europe falling apart... is anyone else worried that the UK will be dragged into this mess by Europe?

It feels to me that we have a slightly more robust recovery but not so robust that we can stamp on it yet... with a lot still driven by consumer spending.

When I did my undergraduate degree I remember my lecturer banging on about how bad deflation was and how hard it is to get out of it... this is doubly more disastrous in a highly leveraged financial system (i.e. Europe, USA and us)...

Am I being to gloomy?

Deflation is A Bad Thing but there is a related form of falling prices which is disinflation. That is not a bad thing and comes from prices getting lower because companies can make things more cheaply and are becoming more efficient.

wotsthat

andyroberts1967 wrote: »

As a civil servant who's not had a sniff of a pay rise for over 4 years, I welcome a spell of deflation. At least it would give our incomes a chance to catch up, if prices are falling for a while. I'm sick of having to stretch money further and further every month. Bring the deflation on!

If you work for an employer who you feel is treating you unfairly what makes you think you'll be treated any better just because prices are falling?

If there was true deflation your employer would want to be paying you less (the stuff you produce is falling in price after all if there's deflation).

N1AK

Bantex wrote: »

It would solve the cost of living crisis we keep getting told about.

No it wouldn't. The moment there's deflation a sizeable proportion of market activity stops. Why buy something today when you'd be able to buy it for less in the near future? Less market activity means less work providing goods or services to the market, and less work means less workers or less hours per worker. Over-supply of labour to the market will mean there's no upwards pressure on wages, and might even lead to wages falling.

andyroberts1967

michaels wrote: »

No progession in your pay band then?

With deflation tax receipts will fall (VAT obviously directly but incomes are likely to fall too as employers can no longer afford the salaries of each workers output is worth less) so I would guess govt employees pay would not be exempt either, sorry.

It seems unclear if the UK and US can carry on growing witout the rest of the world doing so. I am more hopeful for the US simply because they have shale driven energy price decreases and a much less (proportionately) open economy.

My Government department don't have progression pay rises unfortunately.

Bantex_2

N1AK wrote: »

No it wouldn't. The moment there's deflation a sizeable proportion of market activity stops. Why buy something today when you'd be able to buy it for less in the near future? Less market activity means less work providing goods or services to the market, and less work means less workers or less hours per worker. Over-supply of labour to the market will mean there's no upwards pressure on wages, and might even lead to wages falling.

That is the bit I have a problem with.
Most electronic and tech goods are getting cheaper all the time and have been doing so for years, same with cars and many other goods, yet people go on buying them and replacing with the latest model despite knowing they willl be chaeper next year.

N1AK

andyroberts1967 wrote: »

As a civil servant who's not had a sniff of a pay rise for over 4 years, I welcome a spell of deflation. At least it would give our incomes a chance to catch up, if prices are falling for a while. I'm sick of having to stretch money further and further every month. Bring the deflation on!

Very naive thinking. If there's deflation then people spend less, which means less VAT. It also means that there's less job creation, and normally job reductions instead. This combined means that the nations finances will be worse than expected and that the government will have to make more and harder cuts.

You'd have to have literally no understanding of economics to think that it would lead to anyone, civil servants included, being better off.

N1AK

Bantex wrote: »

That is the bit I have a problem with.
Most electronic and tech goods are getting cheaper all the time and have been doing so for years

Your money is also worth less year after year (as long as there's *in*flation...) besides which, the fact that goods in certain sectors decrease in price doesn't a universal rule make. The impact of deflation isn't some theoretical debate, there are real life examples that demonstrate that people will change spending behaviour when there's deflation.

It's also a self-perpetuating problem. Once deflation begins people become more adverse to spending because they want to keep their money in case they lose their job etc. Breaking a country out of a deflationary spiral isn't a simple task, and you can bet it's going to be painful.