“Good” deflation returns

The latest consumer prices figures showed that CPI inflation turned negative again in September. Although the current period of negative inflation should prove to be short lived and shallow, inflation looks set to hover around zero for most of the rest of this year. But negative, or near-zero, inflation at present is nothing to worry about. Indeed, it overwhelmingly reflects the impact of lower energy and food prices, rather than weakness in the domestic economy. Accordingly, it is providing a significant boost to households’ real spending power. And fears that “noflation” would cause consumers to delay purchases in anticipation of reductions in prices, thus weakening the recovery, have proved unfounded. Consumer spending has remained upbeat and confidence remains at a historically-high level. And with nominal wages picking up robustly, the fundamental drivers of spending look strong.