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.

By on January 19th, 2011

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