UK set for a period of deflation
Mark Carney, the Governor of the Bank of England, has this week been very vocal in his view that the UK rate of inflation will remain at around zero for the rest of 2015 and could dip into negative territory. In a traditional economic environment any move into a deflationary period would instil fear into the investment markets and have investors running for the hills. However, the situation today is slightly different and we are in a fairly unique set of economic circumstances which are unlikely to be repeated in our lifetime.
Why shouldn’t we be concerned?
The simple fact is that the collapse of the oil price from well over $100 a barrel to around $60 a barrel is having a major impact upon economies around the world. Oil is a very important commodity and one which in many circumstances dictates the price of services and goods. This reduction in the price of oil has given businesses greater margin to make profits hence the fairly unique situation where inflation could turn negative without pushing businesses over the edge.
If we also look at the consumer market the fall in the price of petrol is leaving more money in the pockets of consumers which will eventually feed into the economy, create momentum and push prices upwards.
Deflation and property prices
While this is a unique set of circumstances we find ourselves in today, inflation is healthy for the property market both in terms of property prices and rental charges. So, there is every chance that as inflation remains at or around 0% this will reduce some of the upward momentum which the UK property market has built up in recent times. However, as we touched on above this is likely to be a short-term phenomenon and, even if it did last longer than expected, the Bank of England is ready to reduce UK base rates.
A reduction in UK base rates from their current level of 0.5% would obviously make finance less-expensive and discourage people from saving money, making them more likely to invest. So while on the surface the statement by Mark Carney this week does not look particularly good reading for the UK investment arena in the short to medium term, the bank is ready to act and this situation is unlikely to be anything but short-term.
When will economies and investment markets get back to normal?
The very fact that the Bank of England is forecasting UK inflation to fall below 0% at some point during 2015 is a situation not many people have experienced in recent times. On the surface it could prompt concern within investment markets but when you bear in mind the fallout still being felt from the 2008 worldwide economic downturn, the collapse of the price of oil not to mention problems within the Eurozone, these are unique times.
It was interesting to see that the Bank of England is ready, willing and able to react if the situation was to worsen and while there is reason to be cautious, perhaps we should be more upbeat that the Bank of England seems to have everything under control?