Inflation is a very difficult beast to control and very often just at that moment when you think it is under control it can roar back into life. Inflation is effectively the ongoing change in the price of an item, although the UK rate of inflation is calculated using the price of a “basket” of goods which reflect everyday life, including a TV, Car, Petrol, etc, etc. Even though many people will have you believe that any inflation is bad for the economy, this is not correct, and there needs to be a balance between the rate of inflation and the amount of income each adult person in the UK receives.

To give an example, if the general rate of inflation was 5% per annum, you would expect your cost of living to rise by 5%, but if your income only rose by lets say 2% then your cost of living has increased by a net 3% over and above the rise in your income. In other words you would not be able to live the lifestyle you had been living and there would be a need to cut your expenditure. A cut in expenditure by everyone in the UK (no matter how small) would filter through to the economy at some stage and we would see a reduction in retail sales. As retail sales become more competitive many retailers would be forced to lower their prices to attract the shrinking pool of money at the consumer’s disposal.

This reduction in prices would reduce both corporate income and profitability and eventually lead to more cost cuts – i.e. job losses, which would then lead to weaker consumer spending, and around we go again. This downwards pressure can often be difficult to turn around and does cause tensions between the government and the public sector, with the government looking to reign in short term spending by reducing wage rises, which would in turn bring down the general rate of inflation (i.e. the cost of the basket of goods used to measure inflation).

In summary borrowing rates and the rate of inflation have a major impact upon the economy of any country in the world. A lacklustre economy can wreck the mortgage loans market, kill the opportunity to refinance second mortgages and eliminate any chances for those looking to refinancing with poor credit ratings. It takes careful managing of the economy by the respective governments to ensure both over exuberance and high inflation periods are short lived and the economy returns to a long term steady growth pattern – easier said than done!