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Is deflation still a major problem?

Only a few days ago the inflation figures surprised on the upside and many analysts believed this was the beginning of the end of the recession. However, today's release of the August monetary policy committee notes suggest that Mervyn King, and two other members of the MPC, believe the economy is still struggling and deflation could be a major problem in the weeks and months ahead.

The fact that a £75 billion increase in the quantitative easing program, as suggested by Mervyn King, would in effect devalue the pound yet more has not been lost on analysts in the UK. A weaker pound should in theory increase exports, because the overseas equivalent price would fall, although even when the UK economy was on its knees and the pound had collapsed there was little or no recovery in exports. If demand for products in the UK continues to fall and prices come under pressure we could be pulled into the deflation spiral which sees cost cuts, prices cut, cost cuts, etc.

After a period of relative calm for the UK economy it seems that there is a greater risk than ever before of a slide in business activity and the potential knock-on effects this would have could be devastating.

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