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Surely deflation will assist with the cost of living?

On the surface there are many in the UK who may initially welcome a bout of deflation to take away significant cost of living increases which have been experienced over the last few years. However, it is easy to forget that while the cost of products and services may well decrease on an ongoing basis it is inevitable that average incomes will fall and more and more people will be pushed into unemployment.

As prices continue to fall, if deflation continues to dominate the UK, we will see no investment for the future because profit margins would be less tomorrow than today and more cost-cutting will be called for. Cost-cutting in industry inevitably means reductions in salaries, or at least smaller salary increases, which will eventually lead to job cuts. However, even those who retain their employment positions will see the value of their income fall in relative terms allowing them to buy less and less of the goods they bought yesterday.

In simple terms there are no winners from deflation because business, consumer and even government income will fall dramatically and there will need to be cost reductions until the situation is resolved. A deflationary spiral, if one were to happen in the UK, is one of the more difficult economic scenarios to break out of.

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