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Is deflation the next problem for the UK economy?

As the UK economy continues to struggle, despite an array of positive reports, the Bank of England statement today would indicate that deflation is still a potential problem for the UK. Mervyn King revealed that inflation is likely to miss the banks 2% target until possibly the end of 2012 and will stay below 1% for the foreseeable future. As a consequence, it looks as if deflation rather than inflation will be a major issue with regards to the UK economy for the foreseeable future.

The £50 billion increase in the quantitative easing program is a perfect reflection of the difficult markets and the Bank of England's willingness to do almost anything to keep the UK economy afloat. Whether the quantity of easing program will be increased again in due course is open to debate, but if it was this would not be a good sign for the UK economy in the short to medium term. It is also evident that the UK government cannot afford to fund an ever expanding quantitative easing program and ultimately it will come to an end sooner rather than later.

For those who think the UK economy is "out of the woods" it may be time to think again because false hope seems to have induced an air of arrogance in some quarters.

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