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Tumbling inflation is no concern for business leaders

14 Jan 2015

But fall in CPI does not justify holding down interest rates, says IoD

Commenting on this morning’s inflation figures, which showed the CPI index running at 0.5% in December 2014, James Sproule, Chief Economist at the Institute of Directors, said:

“This is good news for the vast majority of businesses and households in the UK. Although the Governor of the Bank of England will now have to write to George Osborne explaining why inflation dipped below 1%, neither the Treasury nor the Bank will be worried by today’s figures.

“In the UK, lower prices driven by a fall in the cost of oil will provide a boost to the economy, and underpin domestic confidence and spending. By contrast, there are growing concerns about the situation in Europe, where deflation is being driven – at least in part – by depressed consumer confidence, manifesting itself in delayed purchases. This is the difference between the ‘good’ and ‘bad’ deflation which we are hearing so much about.

“It is also important that we do not let low inflation stand in the way of normalising UK interest rates. Cheap money and high consumer confidence may provide a short term boost to the economy, but the longer the base rate remains at its extraordinary low level of 0.5%, the greater the risk of businesses and consumers assuming this is the new normal and adopting unsustainable plans that rely on these low rates continuing.”

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