The Bank of England’s announcement that Deflation, as had been predicted for several months, has returned to the UK economy for the first time in over 50 years, prompted economists and financial commentators to evaluate the affect a fall in prices will have on the nation’s recovery.
The ‘D’ word will be heard a lot in the coming weeks and months, as experts monitor whether the phenomenon is here to stay, or will simply be a short-term blip before the Bank of England steers the economy back towards its inflation target of 2%.
For the moment, it seems that Deflation – in particular the fall in the price of food prices and transport – is being treated as some welcome respite, which will actually increase living standards – ‘Good Deflation’ it has been dubbed.
However, Mark Carney, the Bank’s Governor, is wary that too much talk about the ‘D’ word could encourage a ‘deflatory mentality’, where a malaise or expectation that prices should continue to fall exists – this could lead to the kind of economic stagnation that has been seen in Japan.
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