'Spare capacity' has built up in the UK economy meaning that inflation risks are 'subdued', according to an economist.
Negative inflation rates pose a bigger risk to the economy than high inflation rates, a major economist said today.
The Capital Economics expert suggested that fears of deflation - or, falling prices - will have increased following the release of latest figures from the Bank of England earlier this week. In its Inflation Report, the institution said that the Consumer Price Index (CPI) would bottom out at 0.5 percent towards the end of 2009 before rising once more.
However, the report also said that CPI - the government's preferred inflation benchmark - would remain well below the target rate of two percent over the next two years.
Deflation conditions generally prolong recessions. This is because consumers are put off from spending big on the high street because prices are falling and better deals are likely to become available if they wait - and because debts built up in times when prices are higher become harder and harder to pay off when prices drop.
Some analysts have said that the major risk to the economy is not deflation but runaway inflation. In particular, the Bank of England's £125 billion quantitative easing programme - where the institution effectively prints new money in order to boost lending flows and promote general economic recovery - is seen as storing up major inflation problems for the future.
However, Jonathan Loynes, chief European economist at Capital Economics, indicated that he disagreed with this point of view. "Because of the amount of spare capacity which has built up in the economy, even with a strong recovery in economic growth, inflation pressures are likely to remain subdued," he commented.
"When you've got a lot of slack in the economy I don't think that automatically translates into a pick-up in inflation. I would view excessively low inflation and possibly even deflation as a bigger danger in the next few years than an excessive pick-up in inflation."
On latest results, the CPI stands at 2.9 percent, down from 3.2 percent the previous month.
