Not only has UK inflation fallen to 0.5pc, but it now looks likely that the rate will shortly turn negative. This has given rise to a heated debate about the distinction between “good” and “bad” deflation. I am reminded of when doctors started talking about the difference between good and bad cholesterol. At that point, I thought the game was up.

With regard to deflation, the good/bad distinction is useful – but only up to a point. If aggregate demand is weak and that forces firms to cut prices and pay, then deflation is a sign of the economy’s weakness. That is the bad variety. By contrast, if a fall in import prices causes inflation to turn negative, this provides a boost to real incomes without implying anything adverse about the state of the domestic economy. This is good deflation.

In practice, this distinction can be a bit blurred, because it may well be that the fall in import prices is itself due to weak aggregate demand in the world. This is surely partly true today. In that case, what may be good deflation for an oil-importing country like the UK, is still bad deflation for the world as a whole.

But once you move on from the origins of falling prices to think about the consequences, this distinction between good and bad deflation loses all force. The current situation mirrors what happened in the opposite direction in the 1970s. When oil prices first shot up in 1973-74, this implied a reduction in real incomes and living standards for oil-consuming countries.

If people accepted this, then there was no reason for the rise in prices to cause continuing inflation. But they didn’t accept it. Workers pushed for higher wages to compensate them for higher prices, and firms raised prices faster in order to compensate them for higher wage costs. This became a wage/price spiral. Strikingly, the position was utterly different when UK inflation was well above the 2pc target two to five years ago. Wage inflation did not respond.

And:

What the eurozone – and the world – needs is not a burst of competitive devaluations, but much faster growth of domestic demand. In Europe, that prospect remains as elusive as ever.

David Fuller's view

Here is a PDF of Roger Bootle's article.

I maintain that the slump in oil prices is initially due to increased supply, thanks to technology.  However, traditional oil producers also increased production as prices fell, in an effort to reduce revenue losses.  The net effect for oil importing countries is positive deflation, which will help GDP growth over the medium to longer term. 

European stock markets are currently discounting the announcement of an aggressive QE programme on Thursday from Mario Draghi of the European Central Bank.  They need it, although not so much as pro-growth economic policies from the individual economies.  Alas, that remains unlikely and if Draghi has been prevented from announcing a large QE package of at least €600bn on Thursday, European stock markets are likely to weaken.