Britain falls into deflation for the first time since 1960
By Adam Pike, News Editor
19 May 2015
Britain has officially dipped into deflation for the first time since records began in 1989 as measured by the consumer price index (CPI). Prices for goods and services fell by 0.1% in April with oil prices, supermarket wars and a strengthening pound driving the CPI downwards.
Inflation had already fallen to zero in February and March - meaning average prices were the same as a year ago. Economists had predicted that inflation would remain at zero for April. Experimental data from the Office for National Statistics (ONS) suggest it is the lowest rate since 1960.
Gold is widely known as a good way to protect against inflation as it can help preserve purchasing power. However, it can also provide useful protection against deflation by offering a counter-party free safe haven. Central bankers worry about deflation because it means there is a reducing quantity of money available to consumers, businesses and governments to pay the interest on their debts. If deflation persists some borrowers will inevitably begin to default on their loans, triggering further defaults and potentially escalating into a full blown banking crisis.
The threat of deflation makes investors much more cautious and inclined to hoard cash. This is already happening with negative bond rates in Germany and HSBC have just announced the introduction of charges for holding customers savings. Widespread hoarding of cash makes it harder for borrowers to find the cash to pay the interest on their debts. This can accelerate the deflationary cycle as it makes more sense for more borrowers to hoard cash. The main tool central bankers have to counter deflation is the resort to more quantitative easing and to print more cash. Whichever way central bankers choose to react, gold could provide some useful protection for your wealth!