There's no inflation in a graveyard

Whilst everyone's been fretting about which privately-educated white person will succeed David Cameron as leader of the Tory party, a significant economic statistic was published. The Consumer Price Index  was 0% p.a.  in February, down 0.3% from January, raising the spectre of deflation, falling prices.

This is the first time on record that the CPI has been zero. George Osborne's response was upbeat:

Osborne said zero inflation was “a first for the British economy” and good news for family budgets.

Is he right? Well, suppose the downward trend continues - you'll be able to buy more stuff in British shops for the same amount of money. In this very minimal sense Osborne's clearly correct. It's also pretty clear that interest rates aren't going to take a hike any time soon. So credit where credit's due, there's two positives for every family budget*.

But whenever I hear a multi-millionaire talk about something being good for 'families', I ask myself 'which families?' Suppose your family isn't so rich that no member of it will ever need to work or claim benefits in order to maintain a non-destitute standard of living.   That is, suppose you are one of the vast majority of people in Britain.

You have good reason to be worried by the inflation statistics. First, employers are far less likely to make wage concessions if prices are falling: they have an excuse handed to them on a plate by the economy - "you are already better off on the same amount of pay". Deflation weakens the bargaining power of labour. Likewise, political pressure to increase benefit payments, already minimal, will be muted.

More alarmingly, deflation can wreak havoc on an economy in a way that threatens jobs themselves. If deflation settles in, people defer purchases, in the hope that prices will fall. Why should I buy that new TV this month, if I think that it's likely to be cheaper next month? Demand for goods and services falls, and so does output and employment. Similarly, firms defer capital investment, and those structural weaknesses of British capitalism, investment and productivity, will take a hit they can ill afford.

Now imagine you're in debt - like most people, and for that matter most corporations. If prices are falling, the purchasing power of a fixed amount of money increases. In particular, the real value of debt increases. Once again, hardly good news for most families.

The line amongst orthodox economic opinion about the possibility of development in this direction seems to be relaxed. The line is that low unemployment will put upward pressure on wages, and thus prevent persistent deflation setting in. The problem with this way of looking at things is that 'unemployment' isn't simply a number in an economic model, which correlates in a law-like fashion with the bargaining power of labour. Behind these abstractions lie real human beings, in real jobs, in real power relationships with their employers. And the nature of the jobs that have decreased unemployment in recent years does not look encouraging for wage settlements - they are insecure, often part-time, zero hour contracts proliferate. This is not a situation that lends itself to confident wage demands. Once a general lack of confidence, low unionisation, low levels of strikes and successful (from a trade union perspective) wage settlements is factored in, the picture looks bleak.

Or at least bleak for families unlike Osborne's.



*And for the budgets of people who don't happen to have families, who seem to have fallen out of the political picture of late.