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Is deflation still a threat?

While there have been many different factors discussed with regards to the ongoing UK recession one which has disappeared from the headlines of late has been the threat of deflation. Depending upon which economic indicator you follow the UK has entered a deflationary period over the last few months although this would appear to be something of a short term blip.

Deflation is the process by which the value of goods and services falls on an ongoing basis leading to significant pressure on profits, the need to cut costs and inevitably an increase in unemployment. There is a feeling that the early introduction of significant rescue funds and rescue packages by the UK government should ensure that any deflationary period will be fairly short lived and relatively harmless. However, if the UK economy was to take a further downturn in the short to medium term this would place more pressure upon the cost of goods and services and potentially lead to a prolonged period of deflation.

Even though there are signs that the UK economy is at worst bottoming out and at best starting to form a foundation for the future, the path to recovery is fraught with many potential dangers.

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