So deflation, the dreaded D-word, has finally struck. Analysts have feared this moment for years, and now it is upon us.
Falling pricesare not as much fun as they sound, they warn, because it can quickly plunge economiesinto a deflationary vortex.
It makes little sense tobuy something today when it will be cheaper tomorrow. So people defer spending, sales fall, companies lay off workers and sales fall again because people have lost their jobs. And so on.
All of which is dismal news for corporate health and stock markets.
And thats where were at.
Happy Days
Or rather, not. Because this doesnt look like the nasty, entrenched Japanese-style deflation that has run on formore than two lost decades, but something else.
This is good deflation. Happy deflation.
Happy deflation occurswhen falling prices make people feel richer, by increasing the value of their wages in real terms.
And with prices falling 0.1% in the year to April while regular wages have risen 2.2%, people do feel better off.
Food prices aredown 3% and petrol 12% over the last year. Happily, these are everyday essentials. People cant delay buying food or filling their motorbecause they reckon it will be cheaper next month.
The supermarket price hasbeen bad news for investors inTesco, J Sainsbury and WM Morrison, but it is good news for almost everybody else.
Motley Fuel
The deflationary shift has also wreaked havoc onthe oil majors, with the BP share price down 11% over the past 12 months, and Royal Dutch Shell down 21%.
And it has spelt doom for FTSE 100-listed mining giants BHP Billiton and Rio Tinto, falling 21% and 10% respectively.
These sectors still face astruggle because with China rapidly slowing, supply may continue to outstrip demand.
Spring Break
But a brief spell of UK deflation could act as a tailwind forthe UK economy.
It will help offset the headwinds from Chancellor George Osbornes emergency budget in July, which is expected to slash spending and benefits.
And it will head off the threat of interest rate hikes, with the Bank of England not expected to act until at least next summer.
This deflation isnt built to last. From July, falling fuel and food costs will start slidingout of the annual comparison.
Some claim CPI could be at 3% by the end of the year, although that seems too high to me.
Joy Is Fleeting
Cheap food, more affordable energy and rock bottom mortgage rates are combining to put more money into peoples pockets.
Given most peoples knife-edge budgets, most of this will flushstraight into the economy, which should be good news for stock markets.
Enjoy happy deflation while it lasts. And pray it doesnt last too long.
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The Motley Fool owns shares in Tesco.
