A quick guide to deflation – what does it mean?

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Investing

MoneyPlus Features Team

2nd June 2015 at 3:42pm

Over the last couple of weeks news headlines have been shouting loudly about deflation. What does it actually mean and is it something we need to worry about? Here at MoneyPlus we explain the basics.

Deflation might sound like you need to be something of an economics expert to understand but it simply means prices are falling. To put it another way, it’s when inflation turns negative.

For the first time in over 50 years, the cost of living – the food you buy, filling up the car with fuel and going out cost a little less (a 0.1% drop in April according to the Office for National Statistics) than they did this time last year so your money goes further and life’s a little easier.

It’s mainly due to a sharp fall in oil prices, transport costs and supermarket price wars causing drop in food costs.

Deflation is normally something serious economists and financial journalists worry about. When it becomes a deep rooted and long-term trend, prices and wages keep falling and people hold off on spending as they think they’ll get things cheaper if they wait longer, it’s generally bad news.

So why, despite a few dramatic headlines, is it being broadly welcomed this time around, with Chancellor George Osborne calling it “good news for family budgets”?

As the Bank of England said just last month, we shouldn’t mistake what’s been happening for “damaging” deflation when prices take a long-term dive as they’ve done in countries such as Japan. The general view is that the recent fall in prices will be short lived and they’ll start to rise again over the rest of the year.

In the meantime, as George Osborne said, there are “positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.”

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