A Fall In Inflation

Mark Sandford - January 2012
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UK inflation has started to come down as predicted by the Bank of England and fell to 4.6% last month. This has been driven by a slowdown in food prices, notably cereals such as wheat and also the cost of non-alcoholic drinks. In a year renowned for bad news, this amounts to the only chink of light at the end of the tunnel. Brent crude is now trading at $112 per barrel, at least down from its peak of $150 per barrel not so long ago.

Inflation ultimately hits those at the bottom of the economic pile on low and medium incomes. The rich may dislike inflation, but they have the means to withstand the heat and emerge the other side. Inflation also has other negative side effects such as distorting allocation of scarce resources. If it was not for the wider background of economic fragility, we would all see interest rates going up by now. Indeed there are many including myself that would argue that the UK has only avoided a double dip recession by virtue of the fact that the Bank of England has maintained the standard rate at 0.5% for so long.

Falling inflation should have tangible benefits for us all over the next 12 months. Obviously the squeeze on household budgets will be eased as prices fall in the shops. There is no doubt that consumers have become much more street wise and know where and how to find a bargain. Also a consistent drop in inflation will help exports and inward investment. In turn, this should in theory help in creating more jobs that are badly needed across the country.

According to the Bank of England's latest report, inflation will continue falling across the remainder of 2012 back to its target of 2% per annum. This is caused by stagnant consumer spending, again driven by poor growth levels and constant fears over redundancy. The conditions are simply not there to see a sustained jump in the inflation rate as too many individuals are too worried about underlying prospects at the moment.

In an earlier article, I did state that I could see interest rates going up in the not too distant future. This is now unlikely to happen and many commentators believe that the current rate of 0.5% will be held even into 2013. This reflects ongoing worry over the eurozone debt crisis and what could emerge in the future. Even the growth rate for the global economy has been cut for 2012 due to this issue.

(See www.bbc.co.uk/news/business-16154965)

Mark Sandford - Permission granted to freely distribute this article for non-commercial purposes if attributed to Mark Sandford, unedited and copied in full, including this notice.

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