New figures show that UK’s inflation dropped below zero in September to a rate of -0.1%. At its simplest, inflation refers to the rising prices of goods and the increased cost of living associated with this. These most recent reports point to a rise in clothing prices and a fall in fuel costs as being the primary cause. While you may think this is an external factor not worth worrying about, business owners should play close attention to the changes in inflation as they plan their overall strategy. Here’s what you need to know.
What Is the Cause of This?
Deflation, sometimes referred to as negative inflation, happens when the supply of goods outweighs the demand for these items. In order to move stock, businesses are forced to lower their prices in order to accommodate the change in consumer demand. We typically see this when there is a shortage of money in circulation, restricting consumer spending and in turn lowering profits for business owners. In rare circumstances, a rapid growth in technology can also lead to businesses being able to lower prices while still being able to keep up profit levels. This is often termed a “benign inflation.”
Is This a Good Thing?
At first glance, negative inflation can seem like a positive, especially for consumers. Everyday essentials like petrol, food, and transport are cheaper than ever. However, for the companies producing these goods, this isn’t good news at all. When looking at the bigger picture, deflation can lead to disastrous consequences. For instance, in order to account for the decreased profits, companies are forced to reduce their workforce. The unemployment rate in the UK rose to 8.3%–around 2.62m people–in 2011, after coming off of the 2008 recession, the highest level since 1994. At its worst, it can also turn bad economic situation, like recessions, into depressions, as we most recently saw in Greece.
Should You Be Worried?
While this isn’t the first time this year that inflation levels have dipped below zero, many analyst’s advice is to remain calm, noting that this is most likely a temporary issue. Economists often refer to periods like this as negative inflation, rather than deflation which is seen as a much longer-term issue. In fact, certain commentaries have stated that the trend is a positive, as everyone involved, including product makers, can benefit from the lower prices. For the UK government’s current Chancellor of the Exchequer, George Osborne, the current inflation target remains at 2%, though the rate has been well below this level since 2014.