This month, Britain officially slipped into deflation with the publication of the retail price index for March. This index showed a decline in the price of a basket of goods measured by the RPI of 0.4%. This basket of goods includes housing, wages and consumer goods. Not since 1960 has the UK suffered from deflation. However, this figure doesn’t tell the whole story. The measures which the government use to reflect price increases are constantly changing. Currently, food and energy costs are not included in this index but are included in the core inflation reading.
By the core measure of inflation, prices rose at an accelerated rate compared to February. In February, core inflation was running at 1.6% per annum while in March this rate increase to 1.7%.
This could very well be a sign of things to come as quantitative easing which has been gathering pace, spills more money into the economy in certain sectors. Colin Ellis, European economist at Daiwa Securities, said: “The record minimum for RPI since 1948 is -0.8 per cent in June 1959. It is only a matter of time before RPI sets a new record low on that front.”
The worry that many economists have is not that Britain will slip into a deep deflationary spiral, but that will eventually go into an inflationary spiral brought on by quantitative easing and higher government spending.
Should the government print more money in order to pay its bills and free the credit market, the inflationary pressures will become intense pretty quickly. At no time in history has the government ever managed to rid the system of excess liquidity for this type hyperinflationary the spiral to take hold. We only have to look at Mugabe’s Zimbabwe to understand the slippery slope of printing a currency into worthlessness.
The problem for everyone in Britain when the government prints more money is that it steals it’s value from existing currency. If there are 10 houses in the economy and the country has £10 in currency, each house is worth £1. The assets are divided by the volume of available currency to arrive at a value for those assets. If the government prints another £10 in currency and there are now 10 houses, but £20 of currency. Each house is therefore worth £0.50. When money is printed, it’s takes value from the currency currently in circulation. This is the reason that the pound has slipped versus all other major currencies in the world by about 25% over the last 12 months.
If deflation is seen today as the bogeyman, hyperinflation is the devil incarnate.
