NS&I index linked... keep or return ?

gozomark

If CPI goes down the base rate will probably be cut even more.

no, because base rate is determined by expectations of inflation in two years time, whereas this would have worked its way out of the figures after 1 year

Will the VAT cut reduce CPI more than RPI?
probably, as RPI has a 0% rated housing component. However, CPI is likely to be alot higher than RPI in a years time anyway (say +1 to 2% CPI v -1 to 0% RPI before any VAT cut)

DavidAC

The bank of England sees a risk of deflation and is cutting base rates to try and prevent it. Cutting VAT will only increase the risk of deflation.

gozomark

deflation is a sustained trend of lower prices, and the worry is that consumers will delay purchases if they think prices will fall - lowering VAT would have a one off impact, and so shouldn't be considered deflationary - indeed if the cut is announced as only temporary, say for 2 years, as seems likely, then it would definitely not be deflationary

deaglecat

gozomark wrote: »

deflation is a sustained trend of lower prices, and the worry is that consumers will delay purchases if they think prices will fall - lowering VAT would have a one off impact, and so shouldn't be considered deflationary - indeed if the cut is announced as only temporary, say for 2 years, as seems likely, then it would definitely not be deflationary

Sorry to be pedantic - but there are two commonly used meanings of the term deflation.

1. Reduction in money supply
2. Falling prices.

http://en.wikipedia.org/wiki/Deflation

The two do not necessarily happen at the same time. We can have less money in the economy but not necessarily falling prices.