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Why Britain Should Still Worry About Deflation

In January, inflation in the United Kingdom rose to 0.3%.

So, why should the British worry about deflation?

This excerpt from a Feb. 16 story in the Guardian explains:

The level of inflation poses a risk to the UK economy, but not in the way that you might think. Inflation is worryingly low, rather than worryingly high.

That may seem a perverse idea at a time when the cost of living as measured by the consumer prices index has risen to its highest level in a year. But consider the following.

The annual inflation rate did not rise in January because retailers were jacking up their prices. On the contrary, a representative sample of goods and services measured each month by the Office for National Statistics was 0.8% cheaper in January than it was in December.

Inflation rose because the January 2016 fall in prices was not quite as big as the January 2015 fall in prices. But the first few weeks of 2015 was when motorists really felt the benefit of the first plunge in oil prices.

There has been another downward lurch in oil prices early this year, but its impact has not been as great. Motor fuels and lubricants — the category in the CPI that covers the cost of petrol and diesel — fell by 6.8% in January 2015, but by 2.6% in January 2016.

As a result, the annual inflation rate was always likely to rise in early 2016. The surprise is that it has not risen more. …

Low inflation could become a big problem if it morphs into deflation.

You can read the entire article by following the link below:
http://www.theguardian.com/business/economics-blog/2016/feb/16/inflation-creeps-up-but-we-should-still-fear-deflation

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