M&G Investments’ Richard Woolnough has hit back at the market sentiment that views falling UK inflation as a precursor to an economic depression.
The rate of UK inflation surprised the market to the downside this morning by falling to 1.2 per cent in September, the lowest rate in five years, from 1.5 per cent in August.
But bond star Mr Woolnough has attacked the consensus that falling inflation is bad for the UK economy, claiming that UK growth should remain strong.
Speaking at M&G’s Bond Vigilantes conference this morning, Mr Woolnough said: “Everyone still has this mindset that low inflation means depression and high inflation means great growth.
“That can exist in certain scenarios, but at times they can be negatively correlated.”
The manager of the M&G Optimal Income fund and M&G’s UK corporate bond funds, said the view the low inflation number today meant the UK economy is going to fall apart was “simplified headline economics”.
He said, in terms of the UK economy, “there are no headwinds” because unemployment is trending downwards, sterling is not appreciating hugely against the dollar and the falling oil price should not slow the economy down.
“So we have a situation where the UK economy looks fine and is still growing,” said Mr Woolnough.
The manager said the current environment was that of a “long term deflationary world” but claimed there can still be good economic growth in that environment.
However, he acknowledged that he had been surprised by how “permanent” this long term deflationary world now looks.
He said: “I think growth is there so I was surprised at how strong that long term deflation is.
“But I do not necessarily see it as bad deflation; it can be seen as good deflation. The fact that the oil price is going down is good for the UK economy, so that is good deflation.”
