Deflation during a recession "not good"

While a drop in the UK's inflation is positive for consumers as the cost of goods drops, there is a danger if the country enters recession, it has been suggested.

Darren Cook, a spokesperson for Moneyfacts, said that if inflation drops too low, it will cause deflation to occur.

In news which could impact the sterling's money exchange rate against other currencies, he explained inflation is good as it results in the creation of wealth.

"Once you get to deflation during a recession, it is not good for the economy because people postpone big payments waiting for prices to go down so it is not good for manufacturing and so forth," Mr Cook added.

The current government target for CPI inflation stands at a level of two per cent. Should the target be missed by more than one percentage point either side, the governor of the Bank of England is obliged to write an open letter to the chancellor of the exchequer explaining why.

In his recent letter, governor Mervyn King said it is possible CPI inflation will return to the target in the first six months of next year.