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The power of deflation

At the moment inflation is around about 1% (as measured by the retail price index) which is well under the government's target of 2%. On the surface this may sound like good news, meaning that prices are increasing at a lower rate than expected, it could be the precursor to a serious bout of deflation which could literally push the UK economy into a depression and have serious implications for the UK population and businesses.

While there is little sign of severe pressure on wage growth at the moment many economists feel about plunging oil prices and a severe fall in consumer demand will impact dramatically in the UK business arena over the coming weeks and months. As pressure builds up on businesses we will see wage growth disappear, cost savings implemented and substantial job losses. This will then reduce the spending power of the UK population and place the country at the beck and call of deflation.

Deflation was the main element which pushed the US economy into a depression during the 1930s and is the worst-case scenario of all possible scenarios at this moment in time. Once an economy moves into reverse and starts to shrink dramatically it can take some years to restart the growth cycle and major damage can and will be done during this difficult period.

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