Honda revealed plans to halt production for four months at its UK base yesterday. In some ways, it’s not a bad deal for the 3,000 workers who are affected. They will receive full pay for two months, and 60 per cent of normal pay for the remainder of the time. It is understood some workers have accepted a redundancy package.

Meanwhile, Aston Martin has introduced a three-day week. “Following detailed consultation with our trade union partners we have agreed further measures to help manage our way through this challenging period, while minimizing the impact on our employees as much as possible,” said an Aston Martin spokesman.

The Honda and Aston moves are both examples of how wage deflation is beginning to emerge. Those who fear that the recent stimulus measures will create inflation down the line, need to wake up.

Inflation is dead, deflation is back, just like in the 1930s. By the time we have felt its full impact, we will be left longing for the good old days of the 1970s, when inflation topped 20 per cent.

Right now, forecasters are predicting mild deflation this year. The retail price index is expected to fall by 3 per cent, although inflation as measured by the CPI index is likely to be less than 1 per cent. But then, in 2010, modest price rises are expected.

The key has always been wage inflation. If our wages are staying still, or going up slightly, then deflation is actually quite good. Things are getting cheaper and we are earning just as much, that is to be welcomed. The danger comes when people start expecting prices to fall, then they may delay purchases. But this danger can be exaggerated. In time, we just learn to accept price falls. People still buy computers and TVs, even though we expect prices to fall. There is no evidence to say that in the longer term, demand for consumer electrics has contracted because of falling prices – far from it.

But, if employers cut wages, or reduce overtime availability, then that is different; that is wage deflation, and that is more serious. When car makers pay staff 6o per cent of their normal wage, and stop production, it still amounts to wage deflation.

The danger is a downward spiral.

There are hints that some workers are agreeing to cuts in wages, in order to minimize job losses. That wouldn’t have happened in the 1970s. Unions did not accept wage cuts, so job losses escalated. Today, in our more flexible society, wage deflation is a real risk. It is less of an issue in the Eurozone.

Those who say inflation will return miss the point.

Inflation occurs when demand exceeds output. The global economy is undershooting potential output. In 2007, global GDP rose by 5.2 per cent. This year, the IMF reckons global GDP will rise by just 0.5 per cent. But the potential to increase global output has not diminished. In China, growth has to be 8 per cent, or unemployment rises. If unemployment rises, that means production is below potential.

Thanks to technology, and innovation, the world’s productive potential is rising every year. The recession means the global economy will lag behind potential for years. There is no danger of inflation. The credit crunch means there is a shortage of money. Banks will not return to pre credit crunch liquidity ratios for years. Central banks can inject more money into the system without creating inflation.

You may not agree with fiscal stimulus. It does tend to introduce artificialities into the system. But the case for new money, for quantitative easing, is overwhelming.

© Investment & Business News 2013