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Deflation may have a silvered lining for UK SMEs

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Deflation

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19 January 2015

Deflation
Deflation could be a good to help SME growth

THE UK economy edged closer to deflation as annual growth of the consumer price index (CPI) fell from 1.0% in November to just 0.5% in December, according to data released by the Office for National Statistics.

It says conventional wisdom is that deflation is a bad thing, leading to a negative economic spiral as households stop making purchases in anticipation of future price falls

But economic experts at business analyst Cebr argue that deflation in the UK could be the perfect tonic to boost growth for SMEs.

It says conventional wisdom is that deflation is a bad thing, leading to a negative economic spiral as households stop making purchases in anticipation of future price falls.

Yet this hardly applies when the main driver of deflation, as would be the case in the UK, is falling essentials prices; households won’t stop purchasing food because prices might be lower in a month’s time, and similarly if you need petrol for your morning commute you aren’t going to postpone filling up your car. With this kind of “good deflation” lower essential costs free up household spending power and boost demand for more discretionary goods and services.

While even this kind of deflation may have negative consequences if persistent – falling prices mean that the inflation-adjusted value of household and government debt rises – a brief bout should prove virtuous. With weak economic growth in the Eurozone and no hope of an export-led recovery anytime soon, the boost to household spending power from falling food, transport and utility prices could be the shot in the arm that the UK economy needs to maintain momentum in 2015 – especially when combined with the pick-up in earnings growth which Cebr expects to emerge this year.

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