In recent months inflation has become increasingly volatile, raising concerns over whether this is a temporary issue or requires more careful attention.
The graph below shows inflation from upto start of 2009. As you would expect in a recession, inflation fell sharply – leading to deflation on RPI measure.
Since then, the inflation rate has crept up, despite the economy struggling to recover and an unemployment rate of over 2.5 million.
How much should we worry about inflation? Should inflation remain the number one economic priority?
Factors to consider:
- Is the rise temporary or is it increasing inflation expectations too?
- Does this reflect a booming economy or cost push inflation?
- Which is more important – Aiming for Full employment or an inflation target of 2%?
- If we sought to reduce inflation too vigorously could we end up with deflation?
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