Does a rise in VAT cause inflation or disinflation?
Obviously it would cause immediate inflation but surely in the long run it evens out again but the higher prices will make AD shift left…
Answer:I think I agree with you though the government is relying on consumer confidence recovering enough for us to keep buying things. We should keep spending to avoid serious deflation but we are not being given any feel good factors – quite the opposite – and those of us with savings are losing money hand-over-fist. Many of us are hanging on to what we've got and will no longer demand as much at any given price. I can live with greater austerity because I have a house and savings but it could be very hard for some people who are used to the good life. Let's hope it doesn't come to that. The trouble is, the more we consumers plan for it, the more likely it becomes.
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