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Where next for UK inflation?

Over the last 20 years inflation has been the devil in the deep blue sea and something which all governments have attempted to control and avoid spiralling higher and higher. A quick look back over the last few years shows that in early 2008 the Consumer Price Index (the government's preferred measurement of inflation) stood at a reasonable 2.2%. However, as the credit crunch began to grab hold and oil prices began to rise we saw prices for an array of goods and services move higher and higher.

As recession was hitting the worldwide economy UK inflation began to creep higher reaching 2.5% in April 2008, 3% in May 2008 peaking at a substantial 5.2% in October 2008. Since then we have seen a fall to 3% in early 2009 with a slight bounce to 3.2% in March 2009 and a fall to 2.3% in May 2009. While on the surface the reduction in inflation could be seen as a positive move for UK consumers there is real concern of a significant further lurch downwards into negative territory. Negative inflation, otherwise known as deflation, can literally tear economies apart and is very difficult to escape from.

Deflation will see profit margins come under pressure, cost reductions in business, unemployment, a reduction in tax income and an increase in the social security budget. So while we often moan about inflation, it is by far and away the best alternative to deflation!

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