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What is deflation? What does it mean for small businesses?


The Consumer Prices Index (CPI) fell 0.1% in year to April 2015, according to the Office for National Statistics (ONS). What does this mean for UK SMEs?

As the ONS pointed out in their full bulletin, this is the first time the CPI has fallen over the year since official records began in 1996 and the first time since 1960 based on comparable historic estimates.

Deflation definition

A decrease in the general price level of goods and services like this is deflation and is unusual – these prices usually increase, which is inflation.

The major contributor to the current deflation are food prices, which fell by 3.0%, and motor fuel prices, which fell by 12.3%. The largest downward contribution came from transport services – notably air and sea fares – with the timing of Easter this year a likely factor.

ONS CPI April 2015 contributors to deflation

The falling price of oil is a main contributor to these reductions in prices. Oil prices are falling for several reasons, including weak demand for oil as European economies struggle to grow and major Asian economies slow down, and improved supply of oil, partially due to increased US production through fracking.

What deflation means for businesses

Many fear deflation as a symptom of economic ill health. But experts say that the UK’s brief slip into deflation is very different to the long periods of deflation, such as in Japan, that can turn into a prolonged economic depression (as seen in the 1930s).

In fact, the Chancellor, George Obsourne, was quoted in the Guardian as saying that “we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing”.

The same positive effects may be seen for businesses. Lower food, fuel and energy costs will help many of Britain’s small businesses during an otherwise challenging period.

To take advantage of the current favourable prices UK companies should look to compare business energy supplier and lock in low business energy prices for the next two, three or four years.

SwitchMyBusiness.com can cut business energy bills by up to 70% with exclusive supplier rates. You could save thousands with a call that takes less than five minutes. For an impartial expert option, fill in the form at the top right of this page or call 0800 411 8830

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