It’s a funny old world when the best financial future for most of us includes a steady rise in the cost of living.
Rises prices contribute to prosperity because they allow companies to pay higher wages, and higher wages give us more disposable income.
Closing that circle means we can spend that extra cash on more things, which increases profits for firms and so on.
Now change that scenario to the one everyone is currently experiencing.
The prices of raw materials are falling. Oil, gold, iron ore, precious metals are cheap and getting cheaper all the time.
Wages are stuck in a rut because firms cannot afford salary increases.
Although people have less disposable cash, they can still afford to buy because the prices of goods are coming down. Then consumers hold off buying because next week, what I want will probably be cheaper.
Welcome to the world of deflation.
But every cloud has a silver lining for someone. The losers are the main oil exporting countries, such as Saudi Arabia, Russia, the United Arab Emirates, Kuwait and Iraq. Their governments have invested in infrastructure and spend according to a much higher assumed price of oil.
Not long ago, oil was $100 a barrel, now its $78 and still falling, down 30% year-on-year.
The five biggest importers of oil – USA, China, Japan, India and South Korea – are laughing all the way to the bank. They too budgeted on a much higher price for oil, but suddenly it’s 20% cheaper.
Powerhouse economy falters
Business costs are falling and companies can cut prices to stimulate demand and still make good profits on the margin falling oil costs are providing.
Deflation is a real threat in the Eurozone, where the cost of living has hovered between 0% and 0.5% for some months. Savers even have a -0.02% interest rate set by the European Central Bank.
Even the powerhouse economy on China is running out of steam. Growths is still double or even treble that of the UK and USA, but inflation is falling and is currently 1.6%, with the barometer dropping.
Industry experts say deflation is knocking on the door because Chinese industries have more spare capacity than they would like and factories are churning out goods that have to have their prices slashed to sell.