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How can inflation make a comeback?

Over the last few months we have seen mention of a potential hike in the rate of inflation in the UK at a time when the UK economy is struggling to pull clear of the recession and the after effects of the credit crunch. Against such a very difficult economic background it is almost impossible to appreciate how inflation could well rear its ugly head again despite the fact that UK consumers and UK businesses have less money to spend today than they have had for some time. So how does this work?

There are many issues which impact upon the rate of inflation UK, with the spending power of consumers and businesses one of them, although ultimately it is input prices and taxes which will dictate any squeeze in prices. If raw commodity prices continue to rise, such as elements like oil, this will at some stage feed into the business arena and result in increased prices as businesses look to cover their overheads and maintain any resemblance of profitability going forward. In a perfect world, with the UK economy so fragile, businesses would love to maintain a relatively steady cost base and avoid difficult and potentially damaging price hikes where possible.

So while in the past we have seen inflation push ahead because of consumer spending power and business spending power, it is not the case this time around.

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