It is other people’s prices that are falling
Deflation is not a good thing, but while Britain has it, business should exploit it. And it’s going to go lower.
The best thing about the UK’s deflation is that it is very selective. The retail prices index has not fallen because shop prices are falling but because energy prices and interest rates have plunged. That’s why the CPI, which excludes mortgage payments, is still above target at plus 2.3 per cent when the RPI, including those costs, is minus 1.2 per cent.
But those cuts in utility bills and housing costs plus petrol prices that, while higher than a year ago, are below 2007 levels do put real money into peoples’ pockets. That boost to spending power helps explain why retail sales are holding up and shop prices are still rising.
So as long as you’re not in the banking or oil business, companies can benefit from the low cost of money and power but continue to sell into a market at rising prices. In other words, buying costs may well be falling but selling prices should be rising.
The low energy prices stem from a fall in demand that is a direct result of the recession and the low interest rates are the authorities’ response to the slump. But there is little evidence that recession is affecting the prices of consumer goods. The high street shops’ cut-price sales of late 2008 have largely disappeared.
The RPI is likely to bottom at around –4 per cent in the autumn and then rise because low mortgage rates are as low as they were a year previously. But even when price rises of general goods drag that index back towards positive territory again, people will still have their mortgage savings and thus the power to spend.
Business is in an ideal position. It should use deflation to buy cheaply whether forward buying fuel, locking into low interest rates or stocking up on cheap input materials where available. But it should continue to raise its own selling prices when demand allows, thus widening margins.
Most business people will never see an opportunity like this again in a lifetime. The mistake would be to miss it.
