Higher Inflation – Lower Growth

The latest inflation figures show a rise in inflationary pressure. CPI has increased from 3.3% to 3.7%. This places inflation considerably above target. Some commentators are now worried there is a danger the MPC could lose credibility in combating inflation.

Just to further illustrate the dilemma for the MPC, the rise in inflation is being caused primarily by rising costs – energy, petrol, fuel. These rising costs cause a shift in AS to the left. Therefore, it can leave the economy with rising inflation, and falling GDP (or lower growth). This cost push inflation leads to a phenomena known as stagflation, and is the worst of both worlds. If the inflation was caused by high growth and rising AD, the MPC would already have increased interest rates. It would help if the ONS made public data for Core inflation and CPIY.

2 thoughts on “Higher Inflation – Lower Growth”

  1. The Phillips curve was never meant to be a policy tool. I see know reason we will not have stagflation. They pumped money in an economy that has not had time to adjust.

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