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Low Inflation Should Not Be Feared, Says George Osborne

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http://www.bbc.co.uk/news/business-30808045

The sharp fall in the UK inflation rate should not be feared, Chancellor George Osborne will say in a speech later.

"We should not confuse this welcome news with the threat of damaging deflation that we see in the eurozone," he will say in a speech.

The speech comes a day after official figures showed the UK inflation rate had fallen to 0.5% in December - its lowest rate since May 2000.

Economists have warned the fall means an outright drop in prices is possible.

But in extracts from the speech released by the Treasury, Mr Osborne tries to distance the UK from the scenario playing out in the eurozone, where deflation has become a problem for policymakers.

He says the sharp drop in the Consumer Prices Index is "almost entirely driven by external factors such as the oil price", which has more than halved since June, and is "much more welcome than in the eurozone", where inflation has fallen to -0.2%.

'Self-reinforcing spiral'

Mr Osborne will say that the UK could experience "a few months of very low or even negative inflation" without any significant risk to the economy.

In a speech to the Royal Economic Society, he will say: "There [in the eurozone] the debate has understandably turned to the dangers of deflation - the risk of a self-reinforcing spiral where economic activity falters, consumers defer purchases as prices fall and nominal debt burdens become ever harder to manage.

"Rising real incomes, a recovery spreading to all parts of our economy, and family budgets that can stretch that little bit further - let's celebrate these effects of low inflation, not fear them."

..

And Danny Alexander, Liberal Democrat Chief Secretary to the Treasury, said lower inflation was acting "like a giant tax cut for the economy".

Speaking on the Today programme, he said: "There's a big difference between something that is a one-off effect of the sort that we are seeing, compared to the persistent, problematic deflation that you have seen in some countries around the world over different periods in history.

"This helps households around the country with many of the financial pressures that people are facing."

Is George getting confused here??? Nominal debt burdens become harder to manage???? Surely he means real debt burdens become harder to manage, but only if incomes decline? If prices are lower than servicing large debts with the same income becomes less of a burden.

Still at least this is something we in the UK don't have to worry about as we have nice low inflation.

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Whenever wages are falling in real terms there will subsequently be gathering pressure on prices as demand falls and companies can afford to compete on price as their cost base declines.

We have experienced unprecedented declines in real wages since 2008 - some 10%! Worse and for longer than the Great Depression.

It seems this thing has only just started.

And yet Osborne's plan for the UK revolves around citizens upping their debt:income ratios by 2000 basis points over the next parliament. All nominal wage increases and then some, turned to servicing debts.

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What is the old RPI measure doing in comparison to CPI ? Is it tracking or diverging ? or does it even matter ?

Since benefits are now coupled to CPI, I wonder if there is less concern, or perhaps Treasury joy even, at a low CPI

Edited by LiveinHope

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They can soon sort out the low inflation problem by slapping VAT on or increasing VAT on what they fancy and as suits.

Edited by winkie

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What is the old RPI measure doing in comparison to CPI ? Is it tracking or diverging ? or does it even matter ?

Since benefits are now coupled to CPI, I wonder if there is less concern, or perhaps Treasury joy even, at a low CPI

1.6% yesterday over the last year averaged around 2.4 % but say it very quietly

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I bet that older generations will soon be demanding that the under-35s start blowing their money on iPads and luxury porridge in order to stoke inflation.

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Austerity? Good for us... bad for them.

Low inflation? Good for us... bad for them.

The euro? Bad for us... good for them.

Referendum? Bad for us... good for them.

The ideological inanity of the Tories? Bad for everybody.

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Inflation has come in rather low.

George Osborne says low inflation is good.
Yet Mark Carney has to write a letter of explanation because the Bank missed its inflation target.

If low inflation is good, does this mean that the inflation target is too high?

Surely this means there is a conflict between George Osborne and the person who sets the BoE inflation target.

Who sets that target? ..... George Osborne!

As a saver, I welcome a bit of deflation... especially if the focus can be on the price of a pint!

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Inflation has come in rather low.

I think most people have had personal deflation for some time.

Rents static/falling.

Mortgage rates dropping.

Food prices dropping as people move to Aldi/lidlk

Petrol price going back to ****ing expensive from totally ****ing unaffordable.

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1.6% yesterday over the last year averaged around 2.4 % but say it very quietly

Ahhh...... <_<

So benefits are now deflating then compared to predictions and expectations. No wonder George is smiling.

Edited by LiveinHope

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And Danny Alexander, Liberal Democrat Chief Secretary to the Treasury, said lower inflation was acting "like a giant tax cut for the economy"

It's a shame they couldn't see that a few years ago when they were fiddling the figures, changing from rpi to cpi etc etc and then starting to pump QE etc.

Of course the general election is imminent and there's probably very little they can do about it in the time left so they're trying to pretend that defeat is victory.

It's effectively an admission that the economy is out of control and rudderless.

Will Mr Carney be giving some more Forward Guidance :rolleyes:

Edited by billybong

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And Danny Alexander, Liberal Democrat Chief Secretary to the Treasury, said lower inflation was acting "like a giant tax cut for the economy"

"That's why our 2% inflation target is like a giant tax hike for the economy"

Oh wait, he didn't say that bit. I'm getting confused. Is deflation good or bad then?

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Whenever wages are falling in real terms there will subsequently be gathering pressure on prices as demand falls and companies can afford to compete on price as their cost base declines.

We have experienced unprecedented declines in real wages since 2008 - some 10%! Worse and for longer than the Great Depression.

It seems this thing has only just started.

Nah........nominal wages continue rising, starting to become real (> cpi)

Too many people looking back not forward. Financial meedya obsessing over oil/japan et al.

Fabulous time to borrow, buy cheap commodities invest and build out infrastructure.

If only we had visionary leadership! not donkeys.

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"That's why our 2% inflation target is like a giant tax hike for the economy"

Oh wait, he didn't say that bit. I'm getting confused. Is deflation good or bad then?

Its a "tax cut" he doesnt have to make. Saudis do. It aint deflation.

Markets have got this completely wrong as they did with rising inflation 3 years ago.

Markets are rubbish. Chasing their own tails and Chief Economystics.

Edited by R K

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If you are paying less at the pumps then it is good news in the near term.

But if that price fall feeds into lower wage pressures then that starts to make debts harder.

The BoE are not worried about wage deflation, they're only worried about price deflation. We've had real wage deflation for about 7 years, it's only when we head towards consumer price deflation that they start making speeches about the dangers of deflation and how inflation "oils the wheels" of the economy.

The logic seems to be that people can get poorer indefinitely, so long as the prices they pay for consumer goods don't start getting lower, everything is okay.

I can't help thinking that purchasing power and consumer prices are in some way connected. But what do I know?

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The BoE are not worried about wage deflation, they're only worried about price deflation.

Not just any old price, it's asset prices they worry about as these backstop banks balance sheets. They couldn't give a toss if the price of bananas and petrol fall, if anything it's good news for the banksters.

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