What is the difference between good and bad deflation?

Jessica Morris
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UK inflation has turned negative for the first time since the 1960's (Source: Getty)

Official data released today has shown that the UK slipped into deflation for the first time in over 50 years.

Normally the word deflation has economists running for the hills, but this time around the mantra has been that this is very much a case of "good deflation". But just what is good deflation, and how does it differ from the usual "bad" kind?

Good deflation

So-called "benign deflation" is primarily due to technological progress as well as productivity improvements. This is when markets are flooded with products, and as the surplus drives down prices, people find their money goes further while they're shielding from the nastier side-effects like falling wages and redundancies.

Bad deflation

On the flip side is the sinister sounding "malevolent deflation". This is when people delay spending in the belief that prices will fall in the future, which in turn curbs sales, squeezing businesses' earnings, and leading to those negative side-effects of job losses and wage cuts.

Negative inflation

Economists term what we're currently experiencing as "negative inflation" - which implies that it won't last long. The Bank of England has previously said it expects inflation to remain close to zero before picking up "notably" towards the end of this year.

How does this affect businesses and consumers?

As Chris Williamson chief economist at Markit says this is a good thing for consumers especially as it comes against a backdrop of weak wage growth since the end of the global financial crisis.

Rather than being a concern, the drop in inflation is a boon to the economy, providing households with greater spending power at a time when pay growth remains frustratingly weak.

And Rain Newton-Smith, CBI's director of economics, said the the UK economy will benefit from a brief foray into negative inflation because it will lower business costs and help delay an eventual rate hike.

Falling oil prices has been good news ... lowering costs for businesses outside of the North Sea oil sector, which is being hit.

With inflation set to remain below one per cent this year, a rise in interest rates anytime soon seems off the cards," she added. "Rates are likely to remain low into next year and beyond, continuing to help the domestic recovery.

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