Falling oil and consumer prices
Consumer prices have fallen over the last year, not least because the price of crude
oil halved from the summer of 2014 to January 2015. In January, the overall consumer
price index was thus lower than a year earlier. A negative annual rate of increase in the
consumer price index is not the same as deflation, however. Instead, the term deflation
can reasonably be used to describe a period of general and sustained price falls. In the
current situation, there is no prospect of consumer prices continuing to fall, and wage
growth is also positive. Hence, there is no deflation.
The direct effect of the oil price fall on the rate of increase in consumer prices is
temporary, unless oil prices decline further. Thus, the actual risk of undesirable price
developments is that the substantial price fall will spread to other goods and services via
the wage formation. This could exacerbate the immediate price fall and ultimately trigger
a negative self-reinforcing wage-price spiral. The risk of that happening remains limited.