inflation

Shrinkflation

Shrinkflation

Shrinkflation occurs when firms reduce the size or quantity of a good and keep prices the same. Shrinkflation is an alternative to increasing prices, and you could argue it is a disguised form of inflation because if you wanted to buy exactly the same quantity of the good, you would have to spend relatively more. However, shrinkflation won’t show up in the consumer price index because prices stay the same. Examples of Shrinkflation In 2009 a Mars bar was reduced in…

How does inflation affect firms?

How does inflation affect firms?

Firms generally prefer inflation to be low and stable. If inflation rise above 3 or 4%, firms may see a rise in costs and uncertainty. In some circumstances, high inflation can negatively affect a firms profits. However, it is worth pointing out that deflation (falling prices) could also be very damaging for economic growth and firms. Some of the costs of inflation for firms Menu costs. These are the costs of changing price lists. If inflation is high, then firms will…

Predicting inflation in the short term

Predicting inflation in the short term

Long-term economic forecasting can be very difficult. A well known joke by John Kenneth Galbraith is: “The only function of economic forecasting is to make astrology look respectable.” However, although there is some truth in this wisecrack, in the short term, we can be reasonably confident about predictions for inflation. In particular, if we see a rise in input prices (raw materials), then there is a very strong correlation between these input prices and later rises in consumer price index.   Sharp rise in Markit/CIPS manufacturing input prices balance in…

Fall in global inflation rates

Fall in global inflation rates

Since the 1970s, we have seen a fall in average global inflation rates. There have been periods of inflation (often due to rise in oil prices), but the overall trend has seen much lower inflation rates. In the 1970s, inflation was seen as one of the main macro-economic challenges, but now many feel the challenge is that inflation has become too low risking deflation. Global inflation shows a marked fall since 1977. The spike in inflation…

Will economic recovery lead to inflation?

Will economic recovery lead to inflation?

Readers question: Will a sustained recovery in the UK lead to inflation? A sustained economic recovery could lead to inflation. If economic growth is above the long run trend rate for a prolonged period, if demand grows faster than productivity, then in that scenario we are likely to see rising inflation (rise in cost of living). However, if the economic recovery is sustainable, if demand grows at a similar rate to productivity, then inflation will remain low. Previous experiences of economic recovery and inflation

How can we have economic growth without inflation?

How can we have economic growth without inflation?

Readers Question: How can a developing country grow without inflation? Economic growth can lead to inflation, for example, if demand rises faster than productive capacity, then we will see rising prices. However, economic growth is compatible with low inflation, and developing economies which can increase productive capacity and general efficiency can see rising living standards without excessive inflation. Economic growth without inflation A simple model to show economic growth without inflation is to show LRAS (long run aggregate supply) increasing at the same rate as aggregate demand (AD)

Why is cost of living in UK so expensive?

Why is cost of living in UK so expensive?

Readers Question: Why is cost of living in UK so expensive? The cost of living depends on: The price of basic necessities – food, fuel, heating, transport, housing / rent, entertainment. The effective cost of living also depends on real wages. It is expensive to live in Nordic countries, but real wages tend to be higher. For items, such as eating out – the US is often cheaper than many European countries, but Americans need to spend much more on private health care insurance. Summary – Why is the UK so expensive. The biggest…

Policies to reduce inflation

Policies to reduce inflation

Inflation is a period of rising prices. Most Central Banks target low inflation. If inflation rises above this inflation target, there are several economic policies, such as monetary policy to reduce the inflation rate. Summary of policies to reduce inflation Monetary policy – Higher interest rates. This increases cost of borrowing and discourages spending. This leads to lower economic growth and lower inflation. Tight fiscal policy – Higher income tax and / or lower government spending, will reduce aggregate demand,…