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Could deflation be a problem in the short term?

While only days ago the talk was about inflation running out of control and impacting upon the UK economy, some economists are starting to have concerns about the potential for deflation. One prominent analyst has already suggested that UK inflation could fall to 0% in the latter part of 2010 with the potential to fall into negative territory and all the problems which this would bring. So is deflation really a problem?

At this moment in time it is premature to talk of deflation and the potential problems which this can bring, as we saw over the last two years. However, there is a need to ensure that demand for goods and services in the UK continues to improve otherwise we could see a reduction in prices as consumers hold back on their spending. This could potentially send us into a downward spiral of reduced prices, redundancies, reduce prices, redundancies, etc which would be a nightmare scenario after the billions upon billions of pounds which the UK government has poured into the economy.

The Bank of England does not appear to have any issues regarding the potential threat of deflation at the moment although we will continue to monitor the situation and advise you of any changes in opinion in the market place.

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