Readers Question: Can you please differentiate between the causes of once-off inflation and sustained inflation?
A temporary period of inflation, also called one off inflation, may be caused by:
- Rising in tax rates. Suppose the chancellor announces a 10% rise in fuel duty. This means prices will rise. But, next year this price rise will not occur (unless of course he announces 10% rises every year)
- Rise in oil prices that is temporary.
- Rise in interest rates will increase the RPI, this is because mortgage costs increase (although it doesn’t affect CPI which excludes mortgage payments) Ironically, The higher interest rates are likely to reduce inflation in the long term because it reduces demand
see: cost push inflation
Sustained inflation is a period of continuous rising prices. The reason price rise are usually continuous is:
- Wage price spiral. If workers get rising wages, they spend more (demand pull inflation) and increase costs for firms (Cost push inflation). This causes inflation. Therefore, next year workers and unions will bargain for further wage increases because they want to maintain their real incomes. In some cases it may cause a period of rising wage inflation.
- Expectations. If inflation is 4% last year. People tend to expect inflation of 4% next year. Therefore, firms will be looking to increase prices and workers will be looking for wage increases. Therefore, expectations can become self fulfilling.
- It is argued a temporary one off inflation can become sustained if expectations are changed. At the moment the UK is experiencing cost push inflation due to rising energy prices. It is hoped these will be a one off price rise. However, the MPC is concerned that it will affect inflation expectations and so the temporary inflation will become sustained.
Hyper inflation is a period where prices rise and the rate of increase in prices also rises see: hyper inflation in Zimbabwe