"Joy for consumers: Britain falls into deflation for first time since 1960 as prices plunge"—The Express, 19th May 2015
"Deflation returns to Britain for first time since 1960"—The Guardian, 21st of April 2009
While it's common to refer to a short spell of falling prices as deflation, the recent drop isn't the sort of deflation that makes the Governor of the Bank of England wake up in a cold sweat.
What's in a word?
The level of prices as measured by the Consumer Prices Index (CPI) in April 2015 was 0.1% lower than it was in April 2014.
The Office for National Statistics headlined a part of their release "UK enters deflation"; but Robert Peston points out that "serious economists" are not inclined to call this fall in prices deflation.
What economists worry about is deflation in the sense of an ongoing, persistent fall in the general level of prices; a deflationary episode. The OECD, for example, clearly contrasts deflation with "short periods of declining prices".
When we use the term in this way, we aren't experiencing deflation.
First fall in prices since 1960 using one measure of inflation
The release of these latest figures gave us headlines saying that Britain is experiencing deflation for the first time since 1960. We saw the same headlines six years ago.
Today, the papers are talking about inflation measured by the CPI. When the Bank of England targets inflation at 2%, it's using this measure.
Data for the CPI only goes back to 1996, but using modelled estimates the last time the price level fell over the year was in March 1960.
Why the exact same claim six years ago?
Last time around, the story was based on a different measure of inflation, the Retail Prices Index (RPI). This showed a falling price level in March 1960, and then no further episodes of negative inflation until March 2009—when the CPI was still positive.
The RPI includes prices related to the cost of housing like mortgage interest payments, which are excluded from the CPI. In 2009, falling housing costs were the reason why the RPI was showing negative inflation while the CPI remained positive.
A large part of this difference was lower mortgage interest payments, which resulted from the Bank of England lowering interest rates. The RPIX—which excludes mortgage interest payments but is otherwise identical to the RPI—showed positive inflation during this period.
This time around, the RPI and RPIX are showing positive inflation while the CPI is showing a falling price level. The CPIH—a variant of the CPI that includes housing costs—also shows positive inflation.
Different measures, different results
The UK has several different price indices, and just as with incomes data your choice of measure makes a big difference to the story you tell. Different measures aim to represent different groups of households, and include different goods and services.
As ever, we should be wary of trying to read too much into one statistic.
Image credit: Carrie Cizauskas
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