Thursday, May 21, 2015

UK toward deflation

The UK went into deflation, according to the official statistics.

The Independent: UK slips into deflation for the first time since 1960

The Office for National Statistics said that the Consumer Price Index (CPI) fell by 0.1% in the year to April 2015. It means that you can get something for lower cost than in the previous year.

Deflation is considered to deteriorate the social activity. People hesitate to spend money if they think the price will fall soon. Struggling for selling items, sellers may decide to reduce the price. It causes further dropping of consumption. This phenomenon is called "Deflation Spiral."

Indeed, Japan had been annoyed by long-lasting deflation. This graph below describes the flow of the CPI, the price ratio compared to the previous year.

Obviously, Japan had experienced deflationary territory for a couple of decades. Actually, I remember that a beef bowl costed 500 JPY in my school age. But I experienced only 250 JPY as a lowest price of it. The change of price is influenced by several factor such as reduction of tariff for beef. Nevertheless, the cheap beef bowl was shocking for me. And I was shocked to see the high price of commodity in the UK.

My past entry: Three cheaper foods in the UK than in Japan

In general, proper economic growth leads to mild inflation, e.g. 2% annually. Both the UK and Japan government aim at this degree as desirable ratio.

Shinzo Abe, Prime Minister of Japan since 2012, emphasized the importance of financial issue in Japan. He took a strong leadership to inflict an inflation in Japan. It seems successful, as far as seeing the right end of this graph. The price of beef bowl is now 380 JPY.

However, rapid progress of inflation has some adverse effects. Our expenditure in daily life inevitably increases. If the wage is not rising together, we will become poor, practically.

I am not sure the policy of Abe administration is right or wrong. And I am curious how Cameron will deal with this situation as well.


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