What's not so well appreciated, however, is that this risk matters for homeowners, because low inflation or deflation are good for renters and bad for home-buyers. "Inflation is very helpful to homeowners," says the University of Stirling's Isaac Tabner. "Deflation tilts the balance in favour of renting."
One reason for this is simply that if there is no inflation the real burden of mortgage debt stays high. If your nominal income rises by 10 per cent a year - which happened in the 70s and 80s - then a mortgage of three times your income will fall to just 1.2 times income after 10 years. With zero inflation, it stays at three times income.
Of course, back in the 70s this benefit was mitigated by high mortgage rates. But it doesn't follow that ultra-low inflation will lead to lower rates. The fact that nominal Bank rate can't fall below zero puts a floor under mortgage rates. And this floor could actually increase if lenders worry that sustained high real debt burdens will increase default rates.
This isn't the only problem with deflation, though. It also weakens one of the reasons to own your home. Doing so is a form of insurance: it insures us against the risk that rents will increase sharply in future. In a world of no inflation, however, this risk diminishes: rents can't rise much if wages and prices aren't rising. This reduced risk, at the margin, tips the balance in favour of renting and against owning one's home.
All this helps explain a big fact - that there is a positive correlation between rates of home ownership and inflation.
We see this in UK history. Home-ownership increased in the inflationary 70s and 80s, but has decreased since 2000, a time of generally lower inflation.
We also see it in the cross-country evidence. Home ownership is much higher in those European countries that have seen high inflation in the last 50 years, such as Spain and Italy, than it is in low inflation Switzerland or Germany.
You might object that this cross-country correlation isn't merely because inflation encourages home ownership. It's also because a large population of indebted home owners creates a political demand for high inflation as a means of eroding real debt burdens.
You'd be right. But this hints at the possibility of positive feedback between low inflation and a lack of home ownership. Low inflation encourages renting, which in turn creates a bigger constituency with a vested interest in ensuring that inflation stays low, which further entrenches renting.
All this matters not just for the individual choice between renting and buying, but for social change too. It's often asked: what might change the English love affair with home ownership? The answer could be: sustained low inflation. Whether this change would be a good thing or not is, however, another matter.
