Is inflation a threat to the UK recovery?
This week sees a number of vital economic statistics in the UK with concerns that the rate of inflation is set to spike upwards in the early part of 2010. Recent figures have shown an increase in the cost of raw materials, much of which came from the upward movement in the price of oil, which will have an impact upon inflation. So what else do we need to monitor in the short term?
There is also concern that the government's refusal to maintain VAT at 15%, and instead return it to 17.5%, will also place further upward pressure on the cost of living in the UK. In what is becoming a more difficult scenario by the day, the Bank of England is also under pressure because of the strategy regarding UK base rates which have remained at 0.5% for some time. If inflation does begin to take off, and the Bank of England does not respond quickly enough, we could move towards a situation where the rate of inflation spirals out of control and we need to see a significant increase in base rates in a very short space of time.
The ability to increase base rates and make borrowing more expensive is a very basic tool in the economic UK government's toolbox but one which has proven very effective over the years.
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