Deflation big threat to UK

The fear of deflation in the British economy is now higher than ever with the theory that the UK could return to 1930’s style deflationary pressure, following last month’s indicators that reveal that many goods have fallen.

With the possibility of even more aggressive rate cuts, with analysts indicating rates could be slashed by 2 percent in the next few months, consumer price inflation is expected to fall by more than the 4.5 percent that was experienced in October.

Even a 1 percent cut could lead to an increased threat of deflation and the current global economic downturn is likely to make the situation worse, as experienced with the downward spiral of deflation in Japan, whose interest rates are the lowest of the world’s major economies.

The drop in inflation last month was primarily driven by the fall in oil prices, which were down by 6.1 percent from the month before, and that followed a 1.5 percent fall in September, according to the Office for National Statistics.

The average petrol price has fallen from 106.4p to 94.9p in the space of the month.

According to economists, Global Insight, inflation is likely to continue to fall over the next couple of months and with oil, energy, commodity and food prices falling in a contracting economy and an increasingly volatile labour market, this points towards diminishing underlying inflation.

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