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Commenting on the new UK inflation figures, Ben Southwood, Head of Research at the Adam Smith Institute said:
We have deflation—albeit extremely mild deflation of 0.1%—for the first time since the 1960s. But this seems to be ‘good deflation’, coming mainly from cheaper goods – especially from cheaper oil— rather than from a drop in consumer demand.
Economists worry about deflation, but only the ‘bad’ kind, when prices are sliding at the same time as wages and output. Bad deflation makes debts harder to bear, puts people out of jobs, and can lead to a downward spiral. Good deflation, when wages and output are rising steadily, makes everyone better off.
Though the Bank of England should stand vigilant against bad deflation, and ease policy if markets think it is coming, it should hold fire right now as UK employees enjoy real pay increases for the first time since before the recession.
The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.