Inflation: Are we looking at goods times or more bad times?

With inflation sitting at it’s lowest in a decade and half (1.5% below the Bank of England’s target of 2%) and now finally below wage increases; are we set to see an end to the longest economic squeeze since Victorian times?  Lets examine the evidence:

We are already seeing a significant fall in oil prices, now approaching their lowest since records began in 1989, and in all likelihood inflation will probably follow.  Capital Economics have suggested that the average household is set to benefit around £455 per year just in the fall of oil prices alone.

We are also likely to see a “tax cut” in other areas over the next coming months and with low inflation and rises in wages this means our pockets are going to be a little fuller than they have been over the last couple of years.

But low inflation and falling prices are only good in the short term.  Over the long term, Economists have concerns that we may see ‘bad inflation’ similar to that witnessed in the US in the 1930s when inflation continued to fall with wages following shortly afterwards.  This kind of ‘bad inflation’ last longer, has weaker growth and therefore takes longer for the economy to recover.

There are already concerns that this is already starting to evidence itself in Europe (not including the fall in oil prices), particularly in Greece.  In an attempt to prevent this, European Central Bank is set to begin quantitative easing in the coming months and with this carries risk and unpredictability.

So whilst in the short term we are expecting to see cheaper prices, increases to wages and an overall improvement in the standard of living, in the long term, however, things are still uncertain for the time being.