Inflation in the UK – as measured by the Consumer Price Index – has once again gone into negative territory, but what does this mean for investors? The CPI rate has been pretty steady at, or close to, zero for much of the year, but now that the figure has gone below that level it’s natural for property investors to question exactly what it means for them.
What is negative inflation anyway?
Before we can explore what negative inflation means for investors, it is vitally important to explain exactly what the term means before we proceed.
Negative inflation, or deflation as it is sometimes referred to, is a macroeconomic condition in which a country experiences falling prices. As the name would suggest, it is the opposite of inflation, which is where rising prices are the predominant force.
One common mistake that many make is to confuse deflation with disinflation. Disinflation is simply a slowing of inflation rather than the drop off experienced when deflation takes hold.
Surely lower prices are good?
Well, this all depends upon which side of the fence you are sitting. Certainly, for the average consumer, money will seem to go a little further as food and petrol prices decrease, but for the investor things can be a little different. While they too will enjoy the lower prices at the pumps and tills, lower prices mean lower takings. So, for those invested in the stock market, decreased company profits could hit their portfolios hard if the period of negative inflation becomes prolonged.
Other economic factors begin to show too if deflation continues for too long. Things such as excess supply can push companies to slash prices further and take cost cutting measures across the whole firm. Wages, lower recruitment, reduced production budgets, lay-offs, and even closures can all follow a lengthy spell of deflation.
What does this mean for property?
Naturally, if this scenario was to occur, property prices could be affected too, but the likelihood is that the property market would be one of the last areas to take a hit. For house and flat prices to take a tumble there needs to be a glut of property on the market, and the current demand in most of the country should negate any early effects of deflation.
It’s also worth bearing in mind that for the vast majority of homeowners, their property is where they live so it is unlikely that they will be selling up unless they are in a position to downsize to raise some capital. Even property investors will only be forced into selling off their portfolios if other circumstances, such as a fall off of renters or loss of a full time job, dictate.
The outlook for the UK property market – at the very worst – looks relatively benign for the time being. The Bank of England is under no pressure to raise interest rates and the CPI figure is expected to climb over the coming year as the recent huge drop in petrol prices begins to fall away from year-on-year calculations.
While it is essential to keep track of where the inflation rate goes over the next few months, those who have chosen to invest in the UK’s property market can sleep fairly soundly for the foreseeable future at least.
If you find investing still on the top of your to-do list in 2016, then it might be worth checking out our quick post on if The Buy-To-Let Market Will Still Be Successful in 2016.