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New term needed for zero inflation and positive growth

The latest inflation figure for the UK revealed record low Consumer Prices Index (CPI) inflation of 0%, while the US figure expected later on Tuesday is expected to show a negligible increase in prices from a year ago.

However, both economies are recovering, and well enough that there’s an expectation of interest rate rises on the horizon.

The normal pattern is for prices to rise alongside economic output. So when the economy is growing, so is demand for goods and services and thus their prices.

It’s not just GDP, but employment is also expanding. The UK has a record high number of people in work, while US unemployment is falling and expected to recover to the pre-recession rate of 5%, according to the Federal Reserve.

There was one other period that required a new term to describe an unusual time.

In the 1970s, stagflation referred to high inflation while output was falling – precisely the opposite of what is happening today, but similarly goes against normal economic relationships.

The reason then, as now, is oil price shocks.

In the 1970s, two wars in the Middle East caused oil prices to shoot up and raise prices, which remained elevated despite slowing economic activity.

Since the shocks were external, and there was little capacity for economies like the US to respond domestically, the result was the unusual combination of sustained high inflation during a recession.

In the past few years, the UK also saw high inflation despite the worst recession in decades. You may recall that the Bank of England routinely described it as imported price pressure. The governor said that high energy and commodity prices were raising costs and there was zero domestically-generated inflation.

Breathing space

Now we have the opposite – there are price movements, but these stem from cheaper imported energy. Oil prices have plummeted since last summer. The Office for National Statistics (ONS) says the UK’s record low 0% CPI has been driven by energy prices (motor fuels) falling 16.6% in the past year to February. It’s also down to food prices, another sizeable imported commodity, which fell by 3.4%.

This means, though, that when volatile elements like energy and food are stripped out of CPI, core inflation is still positive at 1.2%. So, prices are rising and the economy isn’t truly deflationary.

BBC [1]

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Craig Erlam

Craig Erlam [5]

Senior Market Analyst, UK & EMEA at OANDA [6]
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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