What would happen if prices started going down?
The UK is heading for its first period of falling prices since 1989, but is not at risk of a dangerous deflationary spiral, according to the Bank of England. What happens when prices start to go down, asks Colm O'Regan.
Talking about deflation seems sure to result in a "QI klaxon" moment. In the "General Ignorance" round on the popular BBC TV show, presenter Stephen Fry asks a question and then Alan Davies replies with the most obvious wrong answer. The lights start flashing and a klaxon sounds. Davies crumples into a trademark shrug and a lopsided smile. The audience laugh and cheer as the expected happens but at the same time, they're with Alan on this one. "I thought the same thing myself, did you?" they say. A few poindexters, sitting at home, smile to themselves because they knew that Magellan wasn't the first man to circumnavigate the world.
So it seems with deflation.
The Stephen Fry-type figure asks the question: "Is deflation a good thing or a bad thing?"
Everyone/Alan Davies: "Deflation means falling prices, right? Bzzzz! Er ... a good thing?"
"HONK-HONK!" say the economists as they turn the lights on and off.
Apparently it's a bad thing. If you think prices are going to fall you'll wait before purchasing. This means money isn't being spent in the economy, leading to unemployment, reduced spending power and then further price cuts to attract customers spending. This, in turn, means lower revenues and more unemployment.
This results in a downward inflationary spiral. It's a shame that the spiral - such a beautiful mathematical object - should be always associated with something negative and always precede the phrase "out of control". Not all spirals spiral out of control. The Euler spiral is used to work out smooth train-track transitions. Maybe I should save that one for QI.
The presence of deflation feels weird to us. Part of the human condition is to expect that the price of everything has gone up. It's like old age and the weather. Nothing can be done about it but it's a topic for small-talk. We have no natural expectation of prices dropping.
The notion that prices fall feels like time itself is being reversed. There'll be old people talking wistfully about a time when things were more expensive and young people being nostalgic for the future.
Maybe one solution to deflation is for everyone to stop talking about it. That way, consumers would just go on living their lives rather than waiting for some sort of never-ending January Sales Of Life. Or, in keeping with the sales metaphor, get the message out there that, while yes prices are going to drop, if you keep waiting to buy they won't have it in your size. This is known in economics as the "Out of Mediums, just XXXL left Conundrum".
A large component of prices falls has been the drop in the price of oil. AND?! What's so wrong with that? Do people delay buying petrol in the hope the price will drop? If that's the only thing, then is the deflation meaningful at all?
Elsewhere in the economy it doesn't feel like prices are falling. I live in Ireland, and the cost of renting the astro-pitch for the five-aside football game I play went up on 1 February. I rang the venue asking why were prices going up, given "the deflationary spiral" here. The man who answered the phone said that the problem was the astro-football pitches had hedged against oil at $90 a barrel, and now they were locked into that. He also said that the astro-pitch had been asked by Mario Draghi to help inject some liquidity into the economy at an artificial grass-roots level.
Actually he didn't. He just said it was "Um ... like, decided by management". It's probably something to do with insurance premiums. Insurance premiums always go up because customers, distracted by news about deflationary spirals, don't look where they are going, fall over and make a claim.
So if you own a wood burning stove, cycle and have a keen interest in five-aside, you may be experiencing decade-high inflation right now.
Central banks are not, however, going to look at one piece of anecdotal evidence from a whimsical column. They rely on "facts" and "hard data". Therefore, it has been decided that deflation is here and something needs to be done about it.
But what to do? The ECB is bringing in quantitative easing. They'll print money to buy assets issued by governments and banks who hopefully will pass the money onto the real economy. The banks haven't really done that before when they got free money. Instead they used it to cover the holes on their balance sheet. It's a bit like if you had a fire in your house. Instead of the fire brigade bringing you water, they'd bring ice to your wealthier neighbour and ask them to put out the fire.
Why don't they just print the money and give it directly to us? Yes we'd spend it irresponsibly but isn't that the best way to stimulate an economy - people being irresponsible. Right?
I can hear the QI klaxon warming up.
Colm O'Regan is an Irish stand-up comedian and writer. He is a regular contributor to the BBC World Service's In The Balance. He also works on the Kilkenomics festival.
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