I was listening to Radio 5 Live in my headphones on the way into GMTV this morning (on the back of a taxi motorbike at 6:40ish – the best way for live telly as it means traffic problems are diminished).
The money presenter Andy Verity was in a Northampton sausage shop to test the nation’s recession temperature. The last thing I heard was the results of asking listeners to send in their thoughts to finish the sentence “I’ll know the recession’s over when…” sadly I didn’t got to hear Andys response.
Two of the listener responses made me sit bolt upright (never good on a motorbike):
- I’ll know the recession’s over when petrol prices drop back to 90p/litre.
- I’ll know the recession’s over when my weekly food shop goes back to £100 from the £150 it is now.
The simple laws of supply and demand tell us that lower demand generally means prices drop, higher demand and they rise. The definition of recession is a shrinking economy, meaning LESS demand as people aren’t buying things. Deflation (falling prices) – or at least low inflation (prices not rising so quickly) – is part of this.
So the idea that the recession being over means things will get cheaper is bizarre. It should actually mean MORE money in the economy pushing to buy the same or similar amounts of goods so prices will rise. More accurate could’ve been:
- I’ll know the recession’s over when petrol prices hit £1.30/litre.
- I’ll know the recession’s over when my weekly food shop goes up to £175 from the £150 it is now.
Of course for any individual good that’s an oversimplification as other factors such as supply, transport, geopolitics and specific demand come into play, but as a general point expect prices to start rising once we hit the end of recession (whenever that will be – see Is this the summer of love?)