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Concerns about deflation prove premature

Today's announcement that the retail price index was unmoved in February caught many analysts by surprise. A significant number had expected inflation to fall into negative territory with estimates of between 0.5% and 0.8% deflation. When you also consider that the consumer price index rose to 3.2% during February, many people are now starting to believe that the threat of deflation may be receding and the threat of inflation could be the major concern.

As we have covered on a number of occasions, deflation is a situation which can instil a depression into any economy around the world simply by reducing the cost of items and services, leading to business cost cuts, redundancies and less money in consumer pockets. This vicious circle often transpires into a downward spiral of economic turmoil and potentially years of difficulties.

However, the threat of inflation can be just as great and has been mooted as a possible problem in the future by the likes of the Bank of England. Nobody is quite sure whether inflation will replace the threat of deflation but at some point in the future UK base rates will rise sharply to try and dampen the recovery as and when it comes. The situation in the UK economy is very complicated at the moment and there are concerns both for inflation and deflation. Quite which way the economy will go remains to be seen.

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