THE BLOG

Good, Bad or Ugly: Low Inflation in the UK

15/01/2015 08:57 GMT | Updated 15/03/2015 09:59 GMT

The cost of living is now just 0.5% higher than it was a year ago. The December figure is now below 1% for the first time since May 2000 - that's nearly 15 years and means that it's now quite possible that inflation will turn negative in the coming months, meaning prices will be lower than this time a year ago.

You'll probably have felt it in your own pocket.

At the pump, petrol's dropped significantly, under a pound in some places. At the check out, supermarket price wars have helped us all feel a little better off and on your bills, energy prices have been frozen or cut altogether (E.ON has cut gas prices by 3.5%).

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In the Eurozone it's already happened. The consumer price index was down 0.2% in December on the same time last year.

Falling prices sound great, don't they? What's not to like about wages increasing (in the three months to October, average earnings excluding bonuses were up 1.6% from a year earlier) and prices only rising by half a percent?

Economists are in two minds. Some think a bit of deflation is no bad thing, as long as it doesn't last too long.

"In the UK, lower prices driven by a fall in the cost of oil will provide a boost to the economy, and underpin domestic confidence and spending," said James Sproule, Chief Economist at the Institute of Directors.

But others warn that it could lead to the "Japanification" (two decades of falling prices) of the UK economy.

Tom Stevenson, investment director at Fidelity Personal Investing says: "It is very, very difficult to get out of a deflationary spiral once you are in it."

A big fear is that it will impact UK growth.

Warwick Business School's Forecasting System estimates there's around a one-in-four chance that GDP will increase less than 2% in 2015.

One thing pretty much everyone agrees on is that interest rates will not rise any time soon. Expectations of a hike have been pushed into early, if not mid 2016.

Great news for mortgage holders, terrible for savers.

So maybe moderate inflation and the knock-on effects of it are not so bad after all.

Reminds me of a semi-funny joke:

"You know, inflation's not so bad. At least it allows us to live in a higher-priced neighbourhood without having to move."