Lower inflation? Not in the supermarkets

Submitted by martin on 18 February, 2009 - 9:44 Author: Colin Foster

Food prices are still rising at a rate of 10% per year, according to official figures reported in the Financial Times on 18 February.

For months now, economists and the press have been predicting outright deflation - a fall in the average price level - for 2009. Prices of some staple industrial inputs - oil, gas, wheat, metals - have already gone down a lot, and the "70% off", "50% off", and "30% off" signs in shop windows do indicate some falling prices.

Clothing and footwear prices, for example, went down 10% between January 2008 and January 2009.

But day-to-day staples are still getting more expensive. Bread and cereals, by 10% a year; milk, cheese, and eggs, by 9% a year; coffee, tea, and cocoa by 16%. Although oil prices in the global markets have gone down, retail prices of electricity, gas, etc. are still up 36% over the year.

The real inflation rate for poorer households still remains high. And it could remain high even if overall average price levels fall.

We could face a double hit. Price falls on industrial goods and more expensive consumer goods - the sort of thing you might buy once in a while, or maybe not buy at all - tend to kill jobs. Consumers tend to postpone the expensive purchases, thus depressing market demand, and firms tend to postpone investment, in both cases because the postponement is likely to bring you a better bargain. And firms' outstanding debts become heavier and heavier in proportion to the income from which they cover those debts, so more firms go bust.

But that sort of deflation, killing jobs, could go together with inflation in the prices of daily staples.

The case for the unions compiling a working-class cost-of-living index, and pressing for wage settlements which beat inflation even for the poorest workers, remains strong. It is even stronger because the push-out-the-cash policies pursued by central banks to try to prevent or limit deflation may well fuel rapid general price inflation at the next turn in the road, a year or two years down the line.

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