Why is deflation always treated as a dirty word?
When the term deflation is mentioned, the so-called "lost" decade in Japan or the American Great Depression of the 1930s is usually evoked, periods where the economy in question contracted over a long period, resulting in mass unemployment and lower wages.
1: UK Inflation Hits its Lowest Level in 6 Years
Source: Author, Office of National Statistics
But it is not all dark - There can be a "good" side to deflation too! The UK Government's preferred measure of consumer price inflation (Figure 1, green line) has fallen to only 1.3%, its lowest level for 6 years.
For avid Christmas shoppers, the second, blue line in the figure is great news, as it demonstrates that high street prices are on average 1.2% lower than in November 2013!
So as far as presents under the Christmas tree are concerned, our money should go further this year than last.
That is the positive facet of deflation that we can all enjoy – after all, who doesn't like to snap up a bargain in the shops?
Strong growth and falling inflation: A rare combination
What is interesting at the moment is that this period of falling shop prices is coinciding with relatively fast economic growth in the UK.
In the third quarter (July-September), the UK economy (as measured by Gross Domestic Product) grew by an annualised 3% growth rate (Figure 2), among the fastest growth rates since 2007.
2. UK Economy Is Growing At 3% Per Year
Source: Tradingeconomics.com, Office of National Statistics
Today, this growth and deflation combination is being encouraged by lower commodity prices, most notably petrol and food prices (Figure 3).
3. UK Petrol Pump Price Lowest In Four Years
Source: Petrolprices.com, Office of National Statistics
As these two categories represent a large percentage of a typical household's regular spending, no wonder that purchasing power is being boosted as a result.
Much of this growth is coming from the service sector, an area which the UK tends to excel in (think of financial services including banking and insurance, or media services such as advertising, where the UK tends to lead the world).
Where can we invest to profit from this phenomenon?
Option 1: Low-cost airlines
On these rare occasions when inflation falls but economic growth is booming, what are the best areas to invest in?
First of all, let's outline some general…
