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UK Deflation

Posted on 20 May 2015

According to the Office for National Statistics, this is the first time that the Consumer Price Index (CPI) has been negative since the 1960's  

Commenting on this, The Bank of England governor Mark Carney said that he expects inflation to remain low over the next couple of months but should start to pick up towards the 2% target by the end of the year and for there to be an interest rate rise in the summer of 2016.

Whilst at first deflation might seem good for consumers, in the longer term implications are not be so good. Some negative effects may be:

  • Consumers reluctance to spend in the belief that prices may drop further (expectation of decreasing prices becomes the norm)
  • Reduction in the real value of debt (debt eroded over time by inflation)
  • Reduction in credit (lenders pull credit over fears borrows will be unable to maintain repayments against assets that's value is decreasing)
  • Economic Stagnation (less money available leading to lower wages and less investment)
  • Increased unemployment 

It is therefore clear that deflation is not good for consumers or businesses alike.

Link to the BBC story. 

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