The real cost of inflation
When inflation moved into negative territory earlier this year there were cries of joy from many areas of the UK population who had seen the cost of living rising year after year. However, there are two sides to the inflation story with negative inflation putting pressure on product and service prices and often instigating significant cost-cutting programmes. This can lead to reduced disposable income which will lead to reduced economic activity and a potential downturn.
On the other hand, inflation which has arisen to a level which is uncomfortable can lead to increased product and service prices because of increased costs. It can also reduce the real value of the pound in your pocket if income and savings do not rise by an amount which is greater than the level of inflation. So effectively, high inflation together with low interest rates and low wage rises reduces the value of the pound in your pocket and in turn the overall spending power of consumers.
However, there is a need to maintain low inflation because this helps economies grow in the longer term and in a more controlled environment. Sharp swings in inflation can cripple businesses and cripple consumers who will see the real value of the pound in their pockets fall.
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