Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.


The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.


Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake



There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.





19 thoughts on “Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

  1. The problem Shaun, as you are aware, is that disinflation does not erode the debt burden and it also places more pressure on fiscal policy as the taxable incomes fall (VAT in particular).

    I think you also have to take account of official deception. Saying that inflation provides an economic boost has, by definition, to be nonsense as economic growth is real whereas inflation is merely an increase in the price level. But money illusion is doubtless alive and well and inflation is the default mechanism of choice, being the soft alternative.

    There is also a subtle effect on psychology here. In the US, in virtually the last thirty years of the 19th century there was true and significant deflation. This affected wages as well as prices but prices fell far more than wages. However, people felt hard done by because their wages were going down, but did not realise that they were in fact getting much better off as prices were much lower. Does this affect ones attitude to spending? Maybe.

    • Hi Bob J
      Wasn’t that the reason the Fed was created, to end the risk of bond holders being left high and dry? Over 100 years ago the ‘average joe’ in the US was doing very well from technology creating increases in productivity, as you say for decades, and because of a fixed gold standard, lower prices. But the 1% were suffering because their ‘older’ investments were becoming worthless, replaced by new bond holders investing in the latest technology. This couldn’t be allowed to continue, so the Fed was created, ‘money’ was privatised, inflation was recreated and eventually ( with total financialisation after 1971) here we are now, with the whole world ‘defending’ the value of the investments of the 1%. ( or should that be 0.1%?).
      It is pyschology at work, its the constant drip-feed of false statements that have created the ‘matrix-like’ economy of the modern world supporting the new feudalism that uses mass communications and IT to enslave us all in a ‘soft’ cell.

      • Hi JW

        I think the Fed was created largely as a result of the banking crisis of 1907 which was a result of a movement to limit the appeal of trust companies. This issue spilled over into the mainstream banking structure and created a liquidity crisis which J P Morgan, almost single handedly, sorted out.

        I agree with your last para..

        • Hi Bob J
          Your description of the mechanics of the Fed creation is historically sound. However I would contend that the ‘rationale’ was to allow control over the elasticity of money supply ( ie to increase it, and consequently retail prices) which supported the banks and bond holders by shifting their losses onto the taxpayers.

  2. Great article as always.

    The government should soon be happy though. Inflation is starting to return via the petrol pumps. Petrol up to 1.13 from its low point of £1.

    • Hi Anteos

      Thanks and I paid £1.13 myself for some diesel last night although that was partly due to the supermarkets shutting early for the bank holiday. I ended up at one of those BP and M&S combos where not only is the fuel dearish but you have to wait for people doing grocery shopping…..

      You reminded me to check the official data which at £1.09 for petrol and £1.10 for diesel is up on the February low of circa £1.01 for both and like you when this week’s numbers are released I would not be surprised to see another rise.

  3. so I get a cheaper Ipad ( which I cant eat ) but cant afford a house

    gas and electricity were cheaper in 2005 than now

    but petrol here has gone from £4.50 a gallon to £5.09 , a 13..1 % increase . since January

    so why do the upward trends get discounted and the dowward ones not ?

    As CPI my friend, Creative Price Index, all the dropping trends included and the ones that go up only if we cant get away with it !


    • Hi Forbin

      Yes this is an oasis of disinflation is a desert of inflation, so we should enjoy it while it lasts in my view. It is unusual to see fuel priced in gallons and whilst I have no issue with metric measures the use of litres does stop some embarrassing combinations as you imply.

      Meanwhile I have some troubling news for you if it turns out to be true.


      Mind you I cannot see forecasts in the agricultural futures world without thinking of those scenes from Trading Places…

  4. Great blog, Shaun.
    A couple of observations:
    1. The beauty of inflation is that it hides a multitude of sins. People apparently earn more money, the debt is apparently getting smaller, tax revenues apparently go up. The problem with no inflation for the elite is that it exposes the shortcomings of their policies. If, for example, we had zero inflation for thirty years, such that it became a generational norm, I think that people would become much more worried about the government debt and the sustainability of how government works;
    2. You say that, in economics, there is no test-tube experiment, but I have always thought that we came pretty close with North/South Korea and West/East Germany!

    • Hi James

      Your first point is why the establishment is so keen on inflation. No doubt Sir Humphrey had some apt words for this in Yes Prime Minister.

      Ah yes North Korea may be a test tube of sorts, but for what? I don’t think even they are sure….

      • Which of North and South Korea has gulags, mass starvation and a huge gini co-efficient ?

        Which produces competitive goods and has delivered economic growth & an acceptable gini coefficient ?

  5. For in the 300 years prior to the fiat money era the UK price level only increased threefold (so less than 2% p. a.), in spite of there being within that some periods of very high (usually war related) inflation, without which inflation would have averaged even less. Doesn’t that period coincide with a teeny weeny bit of economic growth that I think they call…the industrial revolution?

    The ruling elites are nothing if not highly educated. They know that 2% inflation isn’t the magic elixir of growth. But it is low enough to be barely noticeable, but high enough to erode the wages of the many of us who never see a pay rise and significantly but subtlety reduce the real value of the huge national debt. It’s in the “sweet spot” of their monetary con job. THAT’s why they are so terrified of even 0% inflation, never mind falling prices.

    Shaun it is very refreshing that at least someone is out there is banging the drum on this one, good luck finding anyone in the mainstream media daring to suggest that a stable or falling price level is actually a good thing (should we be surprised though).

    • Hi Gareth and welcome

      My pleasure. As to the Industrial Revolution it was a period where a lot of prices fell. After all if you think about it that was one of its greatest achievements. But the modern establishment wants to turn its face on that which is awkward to say the least when they want to bathe in the great technology gains of modern times.

      The decline in quality of the mainstream media is a problem of these times.

  6. but dont forget guys if we vote to leave the EU

    1, house prices will fail

    2, inflation will be higher

    3, interest rates would be above 3.5% or more

    4, the pound will fall ( or was that the sky ? )

    And we’ll all be too busy worrying about WW III …. apparently

    Given the first four are to all intents and purposes what the GOP wants , why is HMG wanting to stay in ?

    I guess God and they dont know either !


  7. Ouside the eurozone, Hungary and Poland also have deflation around 1% and Bulgaria 2.2%. Given it is a free trade area – we should reasonably expect similar downward pressure on prices everywhere in the EU.

    • Hi ExpatInBG

      Yes there will be disinflationary pressure all round the Euro area. One example of where it has been offset has been Norway via the falling oil price’s impact on its currency but even so CPI is a relatively mere 3.2%. There is also of course the exception which is Ukraine…

      • Ukraine’s problems are political. It is the victim of terrorism and hostile foreign powers. The local village drunk criminal, wannabe rebel simply cannot afford tanks, artillery or VUK surface to air missiles ….

        The Poland / Ukraine comparison over the last 25 years is also pretty close to a test tube experiment in economic and political systems. The EU alone cannot take all the credit, Poland’s Transparency International score puts Greece, Italy & Spain etc to shame.

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