As the rate of inflation starts to fall there can be an expectation that prices may become lower month on month.
We have seen fuel drop down from nearly £2.00 a litre to under £1.50, Gas, Oil and Electricity prices are lowering, in areas the house prices are decreasing, the cost of timber and other building materials has come down. As people see prices lower there becomes an expectation that prices will continue to fall.
When you drive past a garage tonight will you pay £1.42 for a litre or wait until next week when it may be £1.38?
If consumers expect prices to fall, they will delay spending, assuming that they will get a cheaper deal in the weeks ahead. When that happens, businesses start to feel the pinch.
Lass money coming in hurts cashflow, so businesses try to find ways to save on costs. Selling less means lower production, slower production lines require less people, so business start to lower wages or start laying off staff.
From a position of high inflation there is a risk of deflation. The Bank of England work on an inflation target of 2% to prevent deflation.
The Bank of England have a challenge ahead; the high levels of inflation have been created by wars which hit the energy prices – this is not a traditional model of inflation. Lateral thinking may be required.