A large number of small businesses and households will be relieved to hear that the rate of inflation has dropped by 0.3 percent, which is surprising news.
According to official figures from the Office for National Statistics, the Consumer Prices Index (CPI) dropped to 4.2 percent in June this year, while the Retail Prices Index (RPI) dropped to 5 percent. The surprising fall in inflation was thought to be as a result of increased sales in toys, games and electrical goods. However, as the government target remains at 2 percent, analysts warn that inflation may leap to 5.5 percent by autumn this year.
If this happens, savings will reduce in real terms, as even the best savings accounts are below 5 percent. Consumer spending will also fall even further as prices inevitably rise. As the increase in VAT is absorbed, the experts predict that inflation will fall dramatically in 2012, which is good news for the economy.
Interest rates are not expected to rise in response to unstable inflation rates, especially as the current fluctuations in inflation are being influenced by overseas markets. The government predict that a rise in interest rates will push the economy into turmoil. This belief has been further impacted by the news that the UK economy shrank in the months April to June this year by 0.2 percent. According to the Governor of the Bank of England, Mervyn King, inflation will fall nearer to the government’s target of two percent in the next two years.
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