What goes down, must come up

By Y.Y. | LONDON

FOR the first time since 1960, the price of British goods and services has fallen over the course of a year—but only just. Prices fell by 0.1% in the year to April 2015, having been unchanged in the year to March. The change is tiny and its cause is not a concern. But a threshold has been breached: Britain is now in deflation.

Price rises have been smothered by falling oil prices. A year ago, a barrel of the black stuff cost $103; today, $65. That has made it 12% cheaper for Britons to fill their cars with fuel. Food is also 3% cheaper than in April 2014, in part due to an ongoing price war between supermarkets. And the pound is on the rise; sterling is up 17% against the euro in the past year, making imports from Continental Europe, Britain's biggest trading partner, cheaper.

But these factors did not push Britain over the deflationary edge in April. In fact, over the last month, fuel prices rose by 1.6% as the oil price began to rise again. Instead, the main trigger was lower hikes in air and sea fares than is usual at this time of year. That might be because Easter came early in 2015, with holiday special offers starting earlier than usual. Such a seasonal blip in the numbers, in a comparatively small sector of the economy, tells us little about its underlying health.

So there is little cause for alarm. Deflation is unwelcome when it results from low spending in the economy, but not when external and seasonal factors drag down prices. And last week, the Bank of England said that it expects prices to only fall for a short period, before inflation recovers to 2%—the bank’s target—by 2017. This may occur quite rapidly. The oil price fall began in the second half of 2014, so will soon begin to drop out of the year-on-year comparison, causing headline inflation to rise. On a monthly basis, prices bottomed out in January and have risen since. There will only be cause for worry if Britons cease to believe the bank’s reassurances and expect persistent low inflation, and then delay consumption and investment in response.

It would be more prudent for the bank to keep its eye on core inflation, which excludes cheap energy, fuel and food prices. But it is, nonetheless, at a 14-year low. The bank blames this on low wage growth, which, unlike cheap oil, is a problem for the economy. There have been recent signs of more generous pay rises—average weekly earnings excluding bonuses rose by 2.2% in the last year. This suggests that the seven-year squeeze on real wages in Britain might be nearing an end, at last. But core inflation will only rise if these pay rises are sustained, so it is vital that workers do not begin settle for lower pay rises on account of deflation. For now, Britons should enjoy their cheap fuel and holidays—and then demand a long-awaited pay rise.