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Is deflation the new threat to the worldwide economy?

While we have heard concerns regarding inflation, recession and possible depression a new argument was added to the mix today with many now concerned we are entering a period of severe deflation which could well be catastrophic for the worldwide economy. The sharp reduction in UK interest rates was unexpected but well received, but many are now questioning why such a severe reduction was announced at this late stage.

Some economists are suggesting that the main threat over the next few months will be deflation whereby businesses would be forced to reduce their prices to attract business, which will in turn reduce employment, which would reduce consumer spending, which will then see prices reduced again. This has the potential to be a major problem and could create something of a vicious circle. UK businesses are being squeezed from all sides with increased import costs, reduced business, higher finance costs and a cost base which they need to reduce as soon as possible.

While the reduction in base rates should in theory follow through to the finance markets and assist both consumers and businesses this has not been the case of late and initial signs were that the credit card market in particular was not looking to pass on cost savings straightaway.

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