This morning, the UK Office for National Statistics released the news that UK CPI has fallen into negative territory (-0.1%) for the first time in almost six decades. Both the Bank of England and the British media steered clear of mentioning the word “deflation”, preferring to use the rather newfangled term “negative inflation.” The little (and believed, temporary) dip in the price of a basket of consumer goods was acknowledged as a slight relief for British households. But the Chancellor of BoE made sure to add that “…of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them, should they arise.”
The first issue that strikes a careful reader is the seriousness with which monetary authorities discuss otherwise purely arbitrary distinctions between percentage drops in prices, along with the ease with which the gullible media treats them as the results of rigorous scientific analysis. As Mises explained, in a passage even more relevant today,
The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred. In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life. A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. (Mises 1998 [1949], 223).
Second, and related to this, any numbers (and especially such crude numbers) need also to be analyzed in a broader context. In this particular case, it is hardly a relief for British households that £100 worth of consumer goods will now cost them around £99.90, when other prices in the UK economy are experiencing a rapid inflation. Among the conspicuously absent prices from the CPI are housing prices, whose index rose by 9.2 percent in the year to March, as housing prices in London have added 39% since the crisis in 2008 [figure below].
Unsurprisingly, the CIO for Brown Shipley Private Bank was rather sceptical of the latest ONS numbers and of the BoE predictions of low inflation in the future:
“… contrary to the story today’s figures may tell, I see inflation as the dog that hasn’t barked, yet. . . . It’s inevitable that with asset price inflation at such levels, that this will filter into real world inflation – critically however, I don’t see markets pricing this rise in inflation and the associated risks appropriately. . . . Ultimately, until the models used to measure inflation capture real world inflation and asset price inflation, the figures produced each month will at best only tell half the story and at worst distort the truth.”
Mises argued that “… in practical life nobody lets himself be fooled by index numbers. Nobody agrees with the fiction that they are to be considered measurements. . .” (Mises 1998 [1949], 224). Let us hope that will remain true.
