Headed for a fall

Following a long period of stable inflation, the UK economy experienced a spike in price increases before heading south, leaving insurers and pension funds facing the prospect of deflation. Does this pose a threat to balance sheet stability or are other risks still paramount? Aaron Woolner reports

UK consumer price inflation (CPI) woke from its slumber in September last year when it hit 5.2% - over two and half times the 2% average demanded by the Treasury. This was in marked contrast to the previous five years when it was 0.8% off-target at most. But as soon as inflation spiked, the spectre of deflation appeared on the horizon - just as it did in Japan in the early Nineties, following the bursting of the country's asset bubble.

And while CPI - the measure used by the Treasury to