A damaging spiral of deflation is unlikely to hit the UK – with prices actually set to rise “quite steeply” next year, the Bank of England’s deputy governor has said.
Countering some economists’ warnings that Britain could slump into a spiral of falling prices and wages, with a “vicious circle” where consumers delay spending and prices drop further, Ben Broadbent said that was “at best a partial description of the problem, at worst a bit misleading”.
The deputy governor threw his weight behind the theory that Britain is experiencing “good deflation” – spurred by better trade - which will in return boost households’ incomes and support the economic recovery.
Speaking at Imperial College London’s business school, Broadbent conceded that Bank policymakers remained “watchful” of the dangers of zero or negative price growth, after inflation fell to zero in February, its lowest level for more than 50 years.
But he added: “While [low inflation] is unlikely to go on for that long, it is positive, not negative, for demand and output. The likelihood of a broad and protracted deflation, afflicting wages as well as prices, is pretty low.”
It’s a contrasting message to that of the central bank’s chief economist, Andy Haldane, who last week surprised the City with his warning that very low inflation could last longer than expected, potentially even requiring the Bank to cut interest rates from their current record-low of 0.5%.
Broadbent, however, said the decline in prices were mostly due to plunging oil costs “driven not by the declining value of what we sell ... but by a steep fall in the real price of something we buy” and that inflation would bounce back in around a year’s time.
He added: “Barring another steep decline in food and energy prices over the next year, headline inflation is likely to rise quite steeply.”