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Inflation falls but still remains relatively high

During the month of June inflation fell to 3.2% from May's figure of 3.4% although this was still higher than analysts had expected with the reduction in petrol prices having less of an impact than initially forecast. Even though the reduction between May and June is welcomed by the investment arena it was also revealed that inflation in the second quarter of 2010 remained relatively high at 3.5% against a prediction by the Bank of England of just 3.3%.

While inflation has to a large extent been ignored by many analysts and economists, with the Bank of England always of the opinion that inflation would fall in the second half of 2010, it is worrying to see the rate of inflation still relatively high. If inflation does not fall back in the second half of 2010, and the UK economy weakens further, we could enter a doomsday scenario with businesses being squeezed from both sides. Whether or not the Bank of England would be brave enough to increase UK base rates to reduce cheap credit, at a time when the UK economy needs liquidity, remains to be seen but this would be a very difficult situation.

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