Connected Research

Union policy research in the 21st century

UK economy deflates further

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This morning’s official inflation figures see the UK economy slipping further into deflation – a period in which prices are ‘growing negatively’ (falling) rather than rising.

The annual Retail Price Index – RPI, the traditional measure of inflation used by negotiators – fell by 1.2% in April. This represents the largest recorded decline in prices since records began in 1948. In March, when the year-on-year decline was -0.4%, this was the first time the economy had officially recorded prices falling since 1960.

Of course, whether prices are really falling is a matter of… well, statistics, as Benjamin Disraeli (or Mark Twain) might  have said. The Consumer Price Index – called for international comparative purposes the Harmonised Index of Consumer Prices – rose by 2.3% on the figure for April 2008, while the RPI-X measure rose by 1.7% on the figure one year ago.

Both the latter measures take a different perspective on inflation: CPI excludes many items of housing costs (including council tax, mortgage interest payments, house depreciation and buildings insurance), and also trade union subscriptions, strangely enough; whereas RPI-X excludes mortgage interest – a measure originally developed by the Tories when they were in power on the grounds that when your only measure to keep a dampener on inflation is interest rates, it doesn’t make much sense to build what you are doing with that policy tool into how you measure the dimensions of the problem you are trying to tackle with it.

Contributors to the fall in RPI in April include – somewhat evidently – lower mortgage interest payments, which were some 47% lower than in April 2008, as well as home insurance and – on issues which concern all measures of inflation, lower utility (chiefly, electricity) and food bills. Mortgage interest payments make up 4.1% of the RPI basket while housing costs in general (down 12.1% on April 2008) make up 23.6%.

Most people’s experience of whether the prices that they are paying are rising or falling is probably the former rather than the latter. This makes this a particularly interesting time for negotiators since, on their preferred measure – the one that guides their pay settlements – it is the latter. This can only mean greater pain for ordinary workers since if indeed the reality is of rising, rather than falling, prices, then wages are being stretched further by the lack of pay rises stemming from collective bargaining being associated with the RPI measure.

But, RPI tends – usually – to be higher (as the BBC’s chart neatly illustrates) than either CPI or (inevitably) CPI-X. And, what goes around comes around.

As for the economy as a whole, a period of deflation in which prices fall is, strategically speaking, not generally as good news as it might initially appear to be for consumers’ pockets: a market economy loses the signal of rising prices while investment is likely to be reduced, or directed elsewhere where returns are more certain.

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Written by Calvin

19/05/2009 at 1:09 pm

Posted in Economic trends

Tagged with ,

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