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What are the risks to the UK economy from a recovery?

As we covered in one of our earlier posts, inflation figures released today have confounded critics who believed that the UK economy will still in recession. Many analysts have been forecasting further falls in inflation although the CPI and the RPI figures were nowhere near as bad as forecast. While many people will now be cheered by the fact the UK appears to be pulling away from recession there are still significant problems ahead.

Let's not forget that over the last 18 months the UK government has managed to rack up debts of over £1 trillion, tax increases are certain to follow, unemployment has not yet peaked, businesses are still going to the wall and more and more consumers are looking towards IVAs, trust deeds and bankruptcy as a way out of their own financial troubles. It seems more and more that the UK economy has moved into recovery mode, although we need to see a number of positive months before this is confirmed, and inflation may be a problem in the short term.

If the recovery in the economy is sharper and quicker than the Bank of England and the government is expecting then interest rates may lag behind a rise in the rate of inflation and subsequently we could move away from a deflationary risk to an inflationary risk.

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