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Deflation still poses investment risk

19 August 2009 / by Rebecca Sargent

Deflation could still pose a threat to investors, experts have warned, despite the fact that CPI inflation remained static this month.

In fact, in addition to CPI remaining at 1.8 per cent, RPI rose from -1.6 per cent to -1.4 per cent yesterday. But investors should still be wary of deflation, fixed income manager at Threadneedle investment management, Sam Hill has warned.

"If the Bank of England's Quarterly Inflation Report is to be believed, then inflation will spend a good deal of time in the next two years below the two per cent target," he said, adding:

"The level of spare capacity in the economy is the driving force – if the labour market remains unstable and there continues to be a lack of availability of capital at attractive rates in the commercial sphere, the risk really is that inflation could surprise us on the downside."

As the Bank of England continues with its quantitative easing scheme, fears are growing over a rise in inflation, but Mr Hill says: "It's important that investors do not view this in isolation.

"By doing so they may end up making the wrong investment decision, which could mean they lose money in the long run. In my opinion there is a far greater cost if deflationary forces take affect.

"Restricted access to affordable capital and the paring back of wages could still end up trumping even the formidable stimulus package," he added.

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