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Bank of England confident inflation will fall

Paul Tucker, the deputy governor of the Bank of England, has today reiterated the Bank of England's view that inflation will not be a problem in the short to medium term. Despite last month seeing inflation spike to 3.5%, well ahead of the government's 2% target, it seems that a number of factors could come together to bring inflation down in the short to medium term. So what are these factors?

In truth the return to a 17.5% VAT rate had an unfortunate impact upon the rate of inflation, although this is unlikely to be long-lasting, but there are issues which will release the pressure on inflation. The Bank of England also believes there is significant spare capacity in UK economy with many companies running well below capacity. As and when the economy does recover this additional capacity should be available without placing pressure on prices or wages. As a consequence, while the Bank of England is not discounting the threat of inflation, there seems to be a growing confidence that the 3.5% spike will be a short-term event.

Analysts and economist in the UK are praying that the Bank of England is correct because another bout of serious inflation could ruin the UK economy.

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