Expert Commentary

Deflation Persists in U.K. Shop Prices

Consumer prices are rising everywhwere, right? Wrong.

Andy Haldane left his job as the Bank of England’s Chief Economist this week and took a parting shot at the current Monetary Policy Committee (MPC). He thinks that the current belief of faster rising consumer prices being temporary is misguided and that there is a big risk it will persist, requiring a much more aggressive monetary tightening in the future. This, he thinks, could crash the markets and the economy.

The fear of runaway consumer price inflation is becoming quite extreme (it’s funny that nobody seems to fear the runaway asset price inflation that has occurred!) but the evidence still suggests that it’s a narrow set of consumer prices that have been responsible for the increase, such as energy for example.

Consumer price inflation indices are broad and varied, a fact that leads many to dismiss them out of hand, such as famed fund manager Mark Mobius in his recent book “The Inflation Myth and the Wonderful World of Deflation”. Not everyone’s inflation basket is going to be the same and no account is taken of the quality enhancements in goods and services. So, whilst some prices are rising at the moment, many are actually falling (deflating).

The British Retail Consortium’s Shop Price Index measures price changes within a basket of both food and non-food items such as wholesale vegetables, clothing & footwear, furniture and electricals to name just a few. There are 62 product classes, containing 490 items, so it is fair to say that it measures a decent chunk of the British economy’s price changes.

As the chart below shows, the index has been reflecting declining prices since 2019 and even though the rate-of-change is slowing, prices are still declining.

In the U.K., at least, it could be that the excessive fear of rising consumer prices may very well be overblown at this juncture.


UK BRC Shop Price Index YoY%- July 2021