Go out and spend. You won't pay more for Xmas presents

To date, the reduction in British electricity bills is working out at between 12 to 14 per cent

FOR SOME while I have thought that the greatest threat to economic wellbeing is falling consumer prices. If deflation happened, it would be accompanied by a severe recession as consumers postponed purchases in the expectation that goods and services would become cheaper as they waited. At the same time, anybody with high borrowing, whether Government, company or private individual, would find that debt repayments were more onerous. Of course, one doesn't find the Chancellor of the Exchequer, Gordon Brown, or the Governor of the Bank of England, Eddie George, mentioning the danger. It is not yet part of conventional economic discussion; after all, the industrialised economies haven't experienced deflation since the decade before the Second World War. Today's policy-makers have no first-hand knowledge of the phenomenon, nor did the generation before them. In the textbooks, the subject is studied as part of economic history.

I train my binoculars first on Japan and China, where what I call statistical deflation has arrived. Japanese consumer prices are now 0.2 per cent down on a year ago. This is a tiny fall, and has meaning only if consumers begin to hold back from buying. What we know is that the government has found it impossible to revive the economy. In Hong Kong, inflation is down to 0.1 per cent annually. When this was announced, a senior economist at one of the former colony's leading banks said: "Finally we've got bingo here. Deflation is going to be much worse than the government predicted. It's going to be severe. We've just seen the beginning of this." Hong Kong, anyway, is in recession.

Now look across the Channel. In Germany, wholesale prices fell by 4.7 per cent in the year to October. The wholesale price index has shown year- on-year drops in every month since April, and the rate of fall has accelerated. German retail prices dropped on average by 0.2 per cent in October compared with September; France's were also lower. The annual inflation rate in Germany has fallen to 0.7 per cent and in France to 0.5 per cent. Moreover a recent Bundesbank study has found that German inflation may be overstated by as much as 0.75 per cent; if this is so, German prices may already be falling on an annual basis. No wonder the Bild newspaper recently advised its readers to hold off spending on textiles as prices are expected to fall further. All this moved the sober Financial Times to comment: "With inflation in France also at an exceptionally low level, recent trends in German prices have triggered fears that the core of the European economy might be on the verge of deflation." Quite so.

Before focusing on the United Kingdom, let us examine the price of oil. At the end of last week, crude oil had fallen to a 12-year low of $10.65 a barrel; it has declined by 30 per cent since January. This is causing the unthinkable to happen. The proud seven sisters, the enormous groups that dominate the industry, are having to merge. First British Petroleum and Amoco announced that they were combining. Now Exxon and Mobil have said they will pool their businesses. Exxon and Mobil were originally part of John D Rockerfeller's Standard Oil, found guilty of restraining trade as long ago as 1911 and broken up into 33 separate companies. Nearly 90 years later, the pieces are being put together again. As one oilman said: "There is no need to lose your independence at $15 a barrel, but at $10 there is." There is a sort of symmetry here. As globalisation - the restless hunting for cheap supplies from all over the world, whether of manufactured goods or of commodities - is one of the causes of deflation, so the biggest international businesses, the oil companies, combine to resist its effects.

However in Britain there is, on the face of it, absolutely no sign of deflation. The Chancellor's forecast is that underlying price rises will dip below the Government's target of 2.5 per cent in the first half of next year before coming back into line. The Governor, too, is still fighting the old battle: he said the other day that the Bank of England would be quick to tighten monetary policy if inflation looked to be persistently overshooting the official target.

But out there, so to speak, in the real economy, conditions have more the feel of deflation than inflation. Heavy discounting of high-street prices, especially on household goods and clothing, has been taking place all autumn. Retailers naturally pass this squeeze back to manufacturers. As a result the Office for National Statistics reported that the price of goods leaving the factory gate rose at an annual pace of just 0.1 per cent in October - the slowest since 1960. The rise in house prices, too, seems over. The first significant falls for nearly three years have been reported by the Royal Institution of Chartered Surveyors.

I notice, too, that Britain's largest coal producer, RJB, has proposed that miners' wages should rise annually by one percentage point less than inflation until 2003. The coal miners! This would have the effect of cutting their standard of living year by year. The difference, as compared with the Thirties, is that, in those days, the coal owners tried to reduce actual wages. Here is another example of a profound change in the economic climate prevalent since 1945, the dismantling of trade union power.

Finally, the weakening of the monopolies, formerly the nationalised industries, goes on apace. For example, a further 5.5 million domestic electricity customers will be able to move from their existing regional monopoly to other suppliers by mid-December. More than 1 million electricity customers have already decided to make such a change in areas where it has been possible. British Gas has made the biggest inroads into the domestic electricity market; it claims to have signed up 500,000 customers already. This freedom of choice is due to be extended to all 24 million households by the end of June 1999.

What is the result of this admirable liberalisation, this shattering of the post-war compact between state industries and state workers, once common throughout the world and one of the engines of inflation? To date, the reduction in British electricity bills is working out at between 12 to 14 per cent.

It is because of developments like this that I believe inflation is a dead duck. Test my assertion this Christmas. There is no need to pay a penny more for presents or good cheer - or holidays - than one did a year ago. It has been 60 years since one has been able to say that.