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Where next for inflation?

As the financial markets around the world continue to try and come to terms with today's events it seems that one old foe which should be losing power will be the rate of inflation. Oil has fallen sharply today and is now under $100 a barrel for the first time since April and while inflation will probably rise in the UK before it falls, the 'fuel' has been taken away from the recent rise.

This is the one welcome note we can take from the events of today, events which have seen the UK stock market lose up to £50 billion and the money markets grind to a halt. While the £5 billion injected into the market by the Bank of England will assist in the short term, we have a major problem developing and one which the authorities can do little to fend off.

It seems inevitable that interest rates will fall in the short term to try and lessen the impact of the near certain collapse in consumer and business confidence. However, even though a reduction in rates would normally be the quickest fix this may not be the case this time because money markets are illiquid with lenders set to go on strike rather than take the risk of losing out.

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