banking and economics

thinking about deflation

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Ack. The company I work for has just announced that a pay freeze for April. The argument is that this recession is really, really serious and there’s wage deflation in our sector. It’s a big company and covers lots of sectors, some of which are almost certainly in big trouble. My particular area is probably better off than most as it has excellent long term prospects but only just. There’s also an unofficial recruitment freeze, and most discretionary spending (like training courses or staff entertainment) has been cancelled.

My response is that boy am I glad that I spend less than I earn. I imagine that there will be some redundancies, somewhere in the company although I should be safe until at least October, probably April 2010 by which times things will have lightened up somewhat we all hope. My emergency fund is in place, and I’ve worked out (including statutory redundancy pay) that I could go nearly 12 months without having earning any money at all before being bankrupt - I’d have to cut expenses very close to the bone though. Fairly scary stuff, but I have to keep telling myself that it will probably be ok, and if it’s not, it’s not - it’s certainly not the end of the world.

I’ve been spending a bit of my mental effort trying to work out whether we’re heading towards deflation or not. Because I’m the sort of geek that finds it interesting you understand. According to our CEO there is some wage deflation. Meh. It’s in his interests to say that, and I’m not really sure that it’s true exactly, more a function of supply and demand. I know most manufacturing companies are operating on partial weeks. I guess it’s a sort of wage deflation.

Also, when you look at *stuff* pretty much everything is on sale at the minute. Full prices haven’t shifted, but not many people are going to be paying them. I’m sure that’s more than the regular January sales and is basically deflation by another name - it’s the price you pay that’s important, isn’t it? Not the sticker price. On the other hand, 500ml of Pepsi Max went up 11.5% over the weekend. Food prices have been really jumpy for the last few months. I don’t know if they’re always like that though, I only notice the prices of things that I buy regularly (cheese, orange squash, pepsi/coke, fruit, sausage rolls - yes I know that’s a really weird mix, I have no excuses).

The next set of council tax increases is going to average 3.5% - that’s really quite low. But public transport fares have gone up quite a bit more than inflation (as usual), catching the bus costs me 13% more than it did a month ago. Gas and electricity prices are going up, but I’m not sure by how much.

I guess that estimating deflation is pretty hard, and it’s not going to be uniform, just like inflation isn’t normally uniform. As my increase in net pay is going to be around the £10 mark for the 2009-2010 financial year (new tax and NI bands), it’d be helpful to me if inflation was low. I’m guessing that there’s going to be a £50 per month increase in my costs this year, which I could attempt to mitigate for with my discretionary spending. I’m planning on putting spare money into my short term savings anyway because I can, and upping my charitable donations slightly because I should.

If there’s deflation, then that’s definitely a bad thing. Particularly for suckers like me with a mortgage. It’s a negative spiral, and generally means a deeper recession, more job losses, and greater insecurity. It’s normally considered to be worse than high inflation (although I bet it’s a wash with hyperinflation) because there’s very little central banks can do about deflation - they can’t reduce interest rates below 0%.

Anyway, what do you think? Do you think we’re in deflation yet, or am I just not paying attention to some price increases?

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