Should the UK be feeling deflated?

With inflation in the UK now below zero for the first time in more than 50 years, we asked what effect, if any, it could have on the UK MI retail trade?

The main measure of UK inflation turned negative in April for the first time on record, with the rate falling to -0.1 per cent.

It is the first time Consumer Price Index (CPI) inflation has turned negative in the UK since 1960, based on comparable historic estimates, the UK’s Office for National Statistics said.

It was largely due to a drop in air and sea fares, but may yet have ramifications elsewhere. Bank of England governor Mark Carney said he expected inflation to remain very low over the next few months, but added that “over the course of the year, as we get towards the end, inflation should start to pick up towards our two per cent target”.

There’s a feeling thus far that it is a temporary blip. More like “negative inflation” rather actual deflation, which is usually understood as a persistent fall in prices and currency value. It’s not yet got people thinking about pre-war Weimar Republic Germany (unless you count the fact that it was just mentioned there) but it has got people wondering what, if anything, it might mean for their businesses and for consumer demand either in a positive or negative way.

Simon Gilson, MD of the UK’s largest MI retail chain, PMT, says: “First of all the evidence is somewhat tenuous as to what the real inflation figure is. There are so many ways of looking at the whole subject of inflation and how it may or may not affect business or, more importantly, our business.

“The dramatic fall in energy costs over the last 12 months has had a massive effect on the top line inflation figure but has that seen the cost of rent fall or your other essentials? I don’t remember my council tax bills being less than last year or my insurance premiums. The fact is most of our costs have risen as usual and the only way to meet these rises is increases in the price of the goods we sell. If deflation is real then we are all in trouble from whatever angle we look at.”

Mark Rolfe, UK MD of Yamaha sees it as a temporary piece of good news for consumers, and is actually more concerned by the effect of currency fluctuations.

“Firstly we should look at what is the most appropriate terminology for this subject, what we are experiencing at the moment could be better described as ‘negative inflation’ where the ‘D’ word is only used after a sustained period of negative inflation.

“This description is apt as it also supports the view that a temporary period of negative inflation can be welcome as it means that many individuals have a little more expendable income. This can make consumers feel positive and potentially motivate them to spend hopefully on a new musical instrument.

“Deflation on the other hand is more problematic because it describes a trend of declining prices which then motivates consumers not to spend while they wait for the market to bottom out. Working for a Japanese company we are well aware of the ‘lost decade’ where Japan suffered from deflation.

“However, we do need to keep an eye on exchange rate development as this could affect UK prices going forward. We have seen some manufacturers in the Eurozone (in both MI and AV markets) increase prices as high as 15 – 20 per cent as a direct impact over time of the currency shifts between Yen/Dollar and the Euro. Here in the UK we have the added step of another exchange rate when we move from € to £. As we are ‘One Yamaha in Europe’ we have mechanisms to monitor this and when appropriate instigate a price change to ensure that we have parity. As Europe has become smaller we have felt that this is an essential element to ensure that our dealers are not out of sync due to exchange rate shifts.”

Shea Rider, sales director at Tanglewood is confident that the firm’s increased international business will enable it to offset any risk in individual territories and points to its experience in Spain as an example.

“In Spain, where we operate with a long established distributor partner, sales have increased these past five sales quarters consecutively, yet they were one of the first and most visible large countries to fall into deflation last year. In that country people are still shopping for guitars, but obviously they must be finding them a little cheaper we guess, despite their own Euro currency challenges. So maybe we will see similar here.

“We believe and trust that it will be temporary, as a steady price growth in all product areas has become the way of modern life and helps fund expansion, and of course, we have our fingers crossed that this uncertain period will stimulate sales and attract shoppers who are looking for bargains, and hope maybe they will find a Tanglewood product that meets their expectations .

“Our game plan is simple  – continue to add to our ever growing export distributor base, to protect our position through the simple economies of scale and at home in the UK be ready to react to an ever-changing market, keep asking ourselves if we we can or should be doing things a slightly different way or even a radically different way to meet our customers changing needs, and above all else, maintain our reputation for business integrity and transparency in challenging times which we’ve seen in through recent times is an easy thing for companies to compromise and lose and a very difficult business asset to gain.”

A rebound in oil prices, wages and food prices should all help push prices higher later this year, analysts said, with the UK likely to avoid the persistent fall in prices.  And of course a short period of falling prices can help boost consumer spending and provide an overall boost to the economy.

And if we are returning to the sixties, well that didn’t work out too bad for the music biz, did it?