inflation

Should low inflation be the primary objective of economic policy?

Should low inflation be the primary objective of economic policy?

The UK government has given the Bank of England an inflation target of CPI 2 % +/-1. The Bank of England is responsible for using monetary policy (e.g. interest rates)  to achieve this goal of low inflation. But, as well as targeting inflation, the Bank of England also has a wider remit of considering objectives such as economic growth.During 2008 and 2010 the UK had inflation above the target as Bank of England were more concerned about recession Summary – Should we…

uk-real-wages-07-17

Effects of a falling inflation rate

Readers Question: Evaluate the possible consequences of a falling rate of inflation for the performance of the UK economy. A falling rate of inflation means that prices will be rising at a slower rate. A fall in the inflation rate could cause various benefits for the economy:Goods of that country becoming more internationally competitive increasing exports and growth Increase rates of return for savers Improved confidence, encouraging firms to invest and boost long-term economic growth. Increased disposable incomes (if nominal wage growth is constant)However, if a fall in the inflation…

types-of-deflation

Types of deflation

Is deflation good or bad? Mostly experiences of deflation in western economies have been damaging – deflation has been associated with falling rates of economic growth and higher unemployment. However, it is possible to have a different type of deflation – from rapidly improving productivity; then deflation can be consistent with higher rates of economic growth.The key issue is – what is causing the deflation and if prices are falling – what is happening to real wages and real interest…

Inflation Targeting Pros and Cons

Inflation Targeting Pros and Cons

Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed target (usually around 2%). Since the mid-1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and the Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods of high inflation which destabilised economies in the 1970s and 80s. However, since the recession of 2008, economists have begun to question the importance attached to inflation targets and are worried that a strict commitment…

Hyper Inflation in Zimbabwe

Hyper Inflation in Zimbabwe

In 2008, Zimbabwe had the second highest incidence of hyperinflation on record. The estimated inflation rate for Nov 2008 was 79,600,000,000%That is effectively a daily inflation rate of 98.0. Roughly every day, prices would double. It was also a time of real hardship and poverty, with an unemployment rate of close to 80% and a virtual breakdown in normal economic activity. The hyper-inflation was caused by printing money in response to a series of economic shocks. (The highest hyperinflation rate was Hungary…

inflation-expectations

The Role of Price Expectations in Inflation

A key factor in determining inflation is people’s expectations of future inflation. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher wages, this will contribute towards inflation. Higher wages:increase cost-push inflation (wages increase firms costs) increase demand-pull inflation (workers have more disposable income)Also, if firms are expecting inflation to rise (e.g. expecting the price of raw…

money-supply

Money Supply, M0, M3, M4 and Inflation

Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply.Narrow Money e.g. M0 = This is the level of notes and coins in circulation + banks operational balances at the Bank of England. Broad money e.g. M4 money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is…

Causes of deflation

Causes of deflation

Readers Question: What is the cause of deflation? Deflation involves a fall in the price level –  a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation:A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of production through improved technology.Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. This deflation may occur in the…