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Sterling suffers as inflation falls again

Inflation in the UK fell to a five-year low of 1.1% in September after large energy price increases in September 2008 were not repeated in 2009. While there were other elements which accounted for the fall in inflation to 1.1% it is the energy situation which has had the greatest impact. So what does this mean for the UK economy and sterling in particular?

Despite the fact that sterling has been under significant pressure in the currency markets for some time now, it fell again today against key currencies such as the euro and the dollar. This constant decline in the exchange rate is now starting to cause problems within the UK government and the Bank of England with investors now believing that the quantitative easing program could be extended and the funding increased. This would be a bitter blow to the Bank of England which has until now indicated that quantitative easing would not be increased and would end in the short to medium term.

The possibility that the government will be pumping billions upon billions of pounds of taxpayer's money into the system right up until the next general election is not one which will fill Gordon Brown with encouragement. He would rather be in a position to confirm that the markets had turned and the economy was on the way up rather than having to support it for an extended period of time.

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