For people of a certain age, inflation was the great evil - it destroyed wealth and savings. Now, we are told, deflation is the real threat - and unless deflation is conquered there is little chance of the housing market recovering.
24% inflation
In the 1970s, governments fell because of rampaging inflation that peaked at 24% in the UK in 1995 and went back up to 18% in 1980. How strange it is, then, that we are now being told that a little inflation is good for us. In fact, the Bank of England even has a target for an inflation rate of 2%.
So it may seem strange that economists say we should worry about impending deflation when the actual inflation rate, just reported, is 3.2% - above the Bank of England target.
CPI and RPI
The explanation is complicated. The 3.2% inflation rate is based on the Consumer Price Index, or CPI. The CPI includes food items, many of which have risen on a seasonal basis because of bad weather. As the CPI is used by the Bank of England for its inflation target, it is an important indicator.
The alternative measure of inflation is the Retail Price Index, or RPI, which includes house prices and mortgage costs. Using the RPI, inflation is now at zero and is predicted to fall to as much as minus 4% during the rest of this year.
Even under the CPI measure, inflation could turn to deflation with retail energy costs expected to drop in coming weeks.
Deflation - a serious threat
Deflation is as damaging to the economy as very high rates of inflation. The explanation for this is that deflation radically changes consumers' behaviour in ways that can grind the economy to a halt.
Part of the reason why the housing market is so sick is that buyers are wondering if they can buy a house cheaper in a few months' time than they can now. If they think they can, it might make much more sense to delay a purchase for a while. This is especially true for first-time buyers.
First housing, then the economy
Despite optimism in parts of the housing sector, home prices are continuing to fall. The latest figures for England from the Land Registry, for the year ending January, show a 12 months price fall of over 15% and a monthly average reduction of 0.8%. Similarly, the most recent UK house price statistics from the Halifax report a 17.7% annual fall and a monthly reduction of 2.3%.
The concern for the UK economy is that the experience of the housing market will now be felt in the high street. Something similar is already happening with car prices - though the fall in demand also reflects concerns about jobs and the lack of finance. But these are, of course, some of the main factors holding back the housing market.
If we now have consumers who worry about jobs and the availability of loans thinking they could also get their electronic goods and consumer durables cheaper at some time to come, the level of demand and sales in much of the high street will be severely damaged. And if that happens, the faltering signs of improvement in the housing market will disappear.
The spectre of Japan
Although this is a new experience for the UK in the modern period, it did happen in Japan in the so-called 'lost decade' of the 1990s. Deflation destroyed consumer demand, leading to a big cut in domestic production and a massive increase in unemployment, eroding incomes and spending power, leading to further falls in production and rises in unemployment.
A secondary impact of deflation in Japan was to boost the real rate of interest on savings and borrowings. This made it more worthwhile for consumers to save rather than spend. And for businesses it increased the cost of borrowing to invest - so investment was put off, compounding the negative impact on the real economy.
In Japan one result of the deflation was that house prices fell by 90% - far beyond the extent of their previous over-valuation. That experience explains the dread of deflation in the UK today.