Don’t believe the gloom-mongers: deflation will be good for Britain

Campaigning in Putney in 1978, Mrs Thatcher famously took out a pair of scissors and cut a pound note down the middle, telling her audience that the remaining stump represented what was left of the pound in your pocket after four years of Labour and high inflation.

David Cameron may soon be able to repeat the stunt — except rather than cutting a note in half he will be able to stick a bit on the end to represent the extra buying power being granted to consumers courtesy of deflation. Inflation on the government’s preferred measure, the Consumer Prices Index (CPI), has fallen to 0.5 per cent. With the price of crude oil slumping and a supermarket price war in full cry, it may well dip below zero in coming months. That is to say: the cost of living is about to fall.

There are still those who see this as a potential disaster. So ingrained is pessimism in contemporary Britain, if not in the western world as a whole, that it is hard to imagine a piece of economic news which would be treated as a positive development. If inflation were rising, we would never hear the end of Ed Miliband’s ‘cost of living crisis’. Yet falling inflation has been greeted with a new kind of gloom. The stock market has stumbled and commentators are making grim prophecies that falling prices could lead to a Japanese-style downwards spiral. That, to paraphrase an oft-repeated argument, people put off purchases indefinitely in the expectation that prices will be even lower in a few months’ time.

Deflation is feared because it is an unknown, being beyond the experience of virtually anyone alive in Britain today. But look at what’s happening in Spain.