Goldilocks

You might think that children’s fairy tales don’t have much to do with the world of business and the economy.

But I think that the central tenet of Goldilocks has rather a lot to say to us.

Neither too hot nor too cold is, when you think about it, quite a good maxim by which to try and live your life – and manage an economy.

And nowhere is this seemingly sage advice than when it comes to the question of inflation.  However, let me be clear.

 

In a globalised economy where many of the things we might need, or want, to buy come from foreign climes the ability of a nation state to influence, never mind manage, the inflation to which its citizens are subject becomes somewhat constrained.

Hence government (of any hue) should be reticent before claiming too much credit if the inflation statistics are running at a desirable level. They can change – and sometimes in unpredictable and rapid ways.

We don’t have the space here to go into a discussion as to exactly what inflationary measure we should be considering – except to say that the measure most often  used in the UK excludes housing costs.  In an environment of rising house prices and when we are perhaps even in the midst of a house price bubble, , some would say, that this is a mistake.

 

As Mr Osborne noted, the black stuff is largely responsible for the current low levels of inflation in the UK – and perhaps also elsewhere, witness the very low levels of inflation (and now seemingly mild deflation) in parts of the Eurozone.

In as far as that goes, this could be considered ‘good’ deflationary pressure. It might also contribute to economic recovery (as measured by the highly flawed, but still popular, GDP %) by reducing the cost of staples and so freeing up household budgets for spending on other things.

 

But deflation can be, like the greco-roman goddess Fortuna, rather fickle and unpredictable.  A little may be benign – but a lot could be very damaging; discouraging spending and investment in the expectation that prices will fall further.

Even with the more benign data on inflation, there still remains a pressing challenge in the UK economy in relation to levels of disposable income – what some have called a cost of living crisis – these levels are too low. To many they are too low from moral, ethical and economic standpoint.

 

But perhaps we should enjoy it whilst we can. For we know not only how important the price of oil is to so many things we consume in our economy – but also how unpredictable are its price movements.  Who knows when they will start to rise again and how rapidly….

For more information, please contact Stephen Gregson.