Price relief is short-lived

26 April 2009

27 April 2009 | Jake Kanter

Deflation in the UK will provide buyers with temporary relief from last year's record commodity prices, but the effects will be damaging in the long-term, say experts.

The retail prices index (RPI) fell below zero last month for the first time since 1960, marking a return to deflation, according to the Office for National Statistics. The RPI, a well-established measure of UK inflation rates, dropped to minus 0.4 per cent in March, after remaining flat in February.

Falling gas, oil and food prices contributed to the contraction, while a drop in travelling costs for consumers also led to downward pressure.

Analysts suggested further declines in the index were likely this year.

Colin Ellis, European economist at investment bank Daiwa Securities SMBC, said deflation and lower prices might be positive for buyers in the short-term but a protracted period of negative growth would be bad for business and the economy.

Continued deflation, he said, could hamper demand, leading to over-supplied markets and job losses.

Roy Ayliffe, CIPS director of professional practice, said deflation would provide purchasers with some relief from the record commodity prices seen last year, but it is ultimately bad for business, leading to falling consumer demand.

He added that the best scenario for buyers would be low inflation over a sustained period.

Richard Nixon, partner at KPMG Advisory, said deflation presented purchasers with danger and with an opportunity.

He urged buyers to build a strong understanding of raw material markets and make careful decisions when purchasing traded commodities to protect against fluctuating inflation rates.

Benjamin Williamson, economist at the Centre for Economics and Business Research, said contraction would continue this year and warned that deflation was always a danger for businesses.


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