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What Negative Inflation Means for Your Wages

After years of near constant apocalyptic warnings over uncontrolled inflation, there has been a slow but steady decrease in its rate in recent times, until finally in April it reached a critical and highly symbolic level by falling into negative values for the first time in over 50 years.  From a recent peak of 5.2 % in early 2011, inflation has fallen to -0.1% between April 2014 and April 2015. You would be justified in assuming that this must be a universally agreeable turn of affairs, but of course in true British fashion, this negative deflation has sparked some fears all of its own… but more on that in a moment.

For the time being, let’s go forward with the premise that a period of deflation must be, on the whole, a very good thing for the average worker.

It essentially means, that although your pay packet might not have increased, for all intents and purposes you are now 0.1% better off than you were at the same time last year (assuming all other variables have remained precisely the same).

Or to put it another way, the basket of goods and services that would have cost you £100 at the same time last year, now only costs £99.90.

Right about now you are probably thinking ‘ten measly pence, forgive me if I don’t do a double jig in fiscal celebration!’ but in comparison to the state of things just 4 short years ago, this is really quite significant for all of us.

The recent recession saw the most sustained fall in the real-term value of wages that had been experienced in decades, fuelled by high inflation and exacerbated by stagnating levels of pay.  The news of negative inflation is a significant hint that the tables may be turning in our favour, though perhaps only temporarily. Couple this news with recent announcements that the average UK pay has begun to rise again this year and the stage is set for a very real, and more importantly, noticeable increase in how far your money goes.

DeflationAngry Woman

As has now become customary in the UK, all positive financial news must be followed-up with a few dire warnings of grave misfortune ahead. In this instance it is the dreaded dragon of deflation which threatens to steal your wallet and use the money as kindling to burn our economy to the ground.

Whilst deflation can indeed be a very damaging thing for the economy (it causes a rise in the cost of debt, and a few other nasty things), it would be a stretch to use this word in any meaningful sense to describe what is happening in the UK at the moment.  Economists would tend to agree that deflation, as an indicator of an economic trajectory, is only really applicable when it is seen over the course of a sustained period.  At this stage, no one really expects UK inflation to stay in negative values for long because its occurrence now has been caused by a fairly unique set of circumstances and ‘one-off’ factors which have all conspired to push inflation to its current level. Amongst the most significant contributor has been the sudden and dramatic fall in oil prices which was experienced globally at the end of 2014 and beginning of 2015. Oil prices have now begun to stabilise again, and that should put stay to any real risks of a sustained period of deflation.

We might as well celebrate when we can!



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