UK inflation is at a 15-year low, 0.5% in December. This has been caused in part by the sudden plummet in oil prices, lower food prices, and also the high gas and electricity prices from last year dropping out of the sums. Economists are warning that we are on the verge of deflation. Deflation is classically considered a Bad Thing as consumers delay spending in anticipation of lower prices, and this has a knock-on effect to companies selling to those consumers. Meanwhile Mark Carney is keeping interest rates low while waiting for incomes to rise. He doesn’t want borrowers to suffer when their loan repayments increase. And a too-early rise in rates will, again classically, cause a decrease in inflation, the last thing he wants right now.It seems to me that a lot of this argument is baloney. And all of it is very obvious. If the price of oil falls is anyone really going to sit in front of daytime TV refusing to drive anywhere while waiting for even lower fuel prices? I think not. Elwood: “It’s 106 miles to Chicago, we got a full tank of gas, half a pack of cigarettes, it’s dark… and we’re wearing sunglasses.” Jake: “You don’t think it would make economic sense to wait until the price of gasolene falls further, do you?” Ditto food. I don’t know if economists get out of their ivory towers much but if they did they’d notice that at least something is inflating, and that’s people’s waistbands: people love to eat, and they ain’t gonna wait for those fries get even cheaper. Finally, the quirk in the energy prices dropping out of the calculations is neither here nor there. That all happened a year ago.
Conclusion: there’s no danger of consumers postponing their consumption and causing the deflationary spiral. Personally, I’m going to be eating more chips!
No, now is the perfect time to increase interest rates while those poor borrowers who overextended themselves can take it. They can acclimatize themselves to larger mortgage payments relatively painlessly.
And then if the cost of oil, food and energy do go back up it won’t be Carney’s fault if anyone suffers. He’ll be in the clear.