Readers Question: hi would you please explain the likely effects on inflation due to the recent rise in unemployment.
Until last month inflation has been above 5%, well above the government’s target. Since the start of 2008, unemployment has been rising sharply and inflation is forecast to fall sharply.
As unemployment rises, the inflation rate will definitely be reduced. This is because:
Higher unemployment will make it harder for unions and workers to bargain for higher wages. This is because if they ask for higher wages, employers can turn round and say there are 3 million unemployed people willing to work at lower wages. Therefore, wage inflation is likely to be muted during the period of rising unemployment. This will reduce cost push inflation and demand pull inflation.
The higher unemployment is also a reflection of the decline in economic output. Therefore, firms are seeing an increase in spare capacity and increase in volume goods not sold. In a recession, there will be greater price competition. Already, before Christmas, firms like Marks & Spencers are promising price cuts. Therefore, the recession will definitely reduce any demand pull inflation in the economy.
There is another reason inflation will fall. Earlier this year, inflation was caused by cost push factors – rising food prices, rising oil prices, rising electricity prices. However, all these factors are no longer occuring. Oil prices are falling. Therefore, inflation will fall for 2 reasons – lower cost push inflation and lower demand pull inflation.
This is why some fear deflation or very low inflation by the end of 2009.
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[...] being above target for 2008, UK inflation will fall sharply in 2009. (see: inflation) The MPC now worry that inflation could fall below their lower target of CPI 1%. If the recession [...]
i am very upset and i can not hold my tears back because i am in recession and i can not afford some baked beans
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