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Tuesday, January 26, 2010

The great inflation swindle: Why the government really cut VAT.

No doubt some one with infinitely more knowledge on the subject will tell me I’m wrong, but here goes anyway, here is why the government cut VAT back in December 2008.  They claimed it was to increase public spending, but lets be honest, did the 2%ish drop in price really make you buy more?  A £100 item suddenly cost about £98, wow now everyone can afford to buy it.  Reality was inflation was high and a 2.5% VAT cut meant an instant 2%ish fall in inflation.  Bingo, problem solved.

When January inflation figures are announced expect a big increase.  VAT goes back to 17.5% so a 2.5% increase would be expected.  Any less and prices (and inflation without the effect of VAT) are going down.  More than 2.5% and prices are going up.

Maybe this is an overly simplistic view, but it seems to make sense to me.  Add 2.5% to prices (through VAT) and inflation goes up by 2.5%. Simples!

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