If you have kept an eye on the news on Tuesday, you’ll know that inflation has fallen to just 1%. It’s not been that low for a staggering 12 years. The drop is due to free-falling fuel prices and a steady drop in food prices too. This is good news for consumers, and for us as well.
Lower prices equals more cash to spend
We have seen a combination of factors which have brought these low inflation figures. Oil is less than $60 per barrel, it’s cheapest in over 5 years. Food prices are down thanks to fierce competition between supermarkets. A strong pound against other currencies helps with exports as well. What this means overall is more money in the pockets of spenders as the prices of everyday goods fails to rise. In fact if it carried on, deflation might become a concern, something we have to be wary of.
The positive side to all of this is the good mood this sort of news brings. When homeowners can spend less at the pumps and in the shops, it should have a confidence boosting effect. Less regular money spent means more money available for big ticket items like windows and doors. Our industry tends to be affected directly by consumer confidence. We saw how low it was during the recession and how the industry suffered because of it. Now, with fuel set to drop for probably a while longer yet, and food prices set to get cheaper, pressure on the wallets is going to reduce and consumer confidence should continue to rise.
Low inflation a bad thing?
There are a few things to keep an eye on though. Deflation looms larger the lower we get. If prices actually start to reverse, this will start to put serious pressure on retail business. The ideal inflation level is around the 2% mark. The other factor some economists are worried about is that some might hold back on spending in the hope that prices will continue to fall so they can save even more money. If they do, the flow of cash might start to dry up, which would of course have a negative impact.
Personally, I don’t think this will happen. The British public have had quite a few years of restraining their spending. Many of us have put off doing those desired home improvements in the hope that things might get a bit better and they might be able to save a bit more cash before they absolutely have to cash out.
On a wider note, we do have to keep an eye on Russia. It’s the world’s 8th biggest economy, included in the BRICS group and is one of the worlds biggest oil exporters. Their currency, the Rouble, has been in free fall over the past few weeks and is entering a full blown currency crisis. Interest rates are at an eye watering 17%, with no sign of the flow of cash leaving Russia stopping. Oil looks like it will continue to fall, and with oil being really only the main product to come out of Russia, it doesn’t look great. Whilst Russia doesn’t have many international friends right now, it can’t be allowed to fail. Many of the world’s banks are exposed to Russian debt and the oil markets. The last thing we want to cause is another run on financial institutions or worse. Who’d be a Russian right now?