inflation

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Bank of England Inflation Target

Readers Question: What credit can the adoption of central bank independence take for the relative stability of the UK business cycle since 1997? The MPC, Bank of England,  are responsible for setting interest rates and determining UK monetary policy. They seek to keep inflation close to the government’s target of CPI 2% +/-1 % Since 1997, the UK has enjoyed a period of unbroken economic growth and low inflation. It appears that the UK has been able to avoid the ‘boom and bust‘ economic cycles that characterised the boost…

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Inflation Target and Monetary Policy

Readers Question: Explain how monetary policy works under an inflation targeting regime. I have written some answers to this question on previous occasions. These answers should help:How MPC set Interest Rates  The MPC and the setting of Interest rates  MPC and Inflation ForecastsMeaning of Inflation Targeting Inflation Targeting means that the Central Bank has a primary objective of achieving the Government’s inflation target. This means in theory they do not target other macroeconomic objectives like unemployment and growth (although in practice they may worry about a recession). It also means they…

Unemployment and Inflation in UK

Unemployment and Inflation in UK

Readers Question: how the unemployment and inflation is related to country’s economy If we take the example of the UK, we can see differing examples of how unemployment and inflation are related to a country’s economy. The key to this question is what causes unemployment and inflation. There are several different factors, but it is important to consider both demand side and supply side factors. Unemployment and Economic Growth. The most obvious factor is that higher economic growth will reduce unemployment. Since 1992, the UK has experienced a long period of…

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Inflation Convertor / Calculator

Definition of inflation – a sustained increase in the general price level. If you ever ask an old relative about prices, they will invariable start talking about how dear things are these days. “I remember the days when you get a fish and chip supper, 2 loaves of bread and pint of bitter and still have change from a shilling…” Inflation means the value of money decreases. £10 might not seem much today but back in 1800 but in 2007, that £10 would be worth £120. What cost $10 in 1800, would…

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CPI Inflation Forecasts from Bank of England.

Yesterday, the Bank of England released its inflation forecasts for 2008 and 2009. It suggests that if base rates are kept at 5.25% then inflation will stay close to 2%. However, if they cut interest rates to 4.5% (as many in the City have been predicting) then inflation is likely to breach the 3% target. The Bank, therefore, have a difficult balancing act. On the one hand we have rising inflation (from cost push factors, especially food and energy) but we also have a slowing economy. Although, the Bank are keen…

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The Importance of Full Employment and Low Inflation

A quick look at the difference between UK and US Monetary Policy, in particular, which is the most important objective to target. This dilemna is important because the UK could be experiencing inflation and lower growth, therefore, the MPC may be tempted to keep interest rates too high in order to target low inflation. By contrast the Fed have an objective of both inflation and full employment. The Fed have cut interest rates very significantly in recent weeks. Should Low inflation be the Most important objective for Government? Previous Essays on…

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CPI Inflation Forecast to Rise

Despite, concerns over a global slowdown the UK can expect to see a rise in the rate of inflation this February. The main cause will be unexpectedly large rises in the price of food, particularly wheat and dairy products. The Office for National Statistics said factory gate inflation rose at its fastest annual pace in more than 16 years, after the annual rate shot up to 5.7% last month from 5% in December. The rise was driven by an all-time high annual inflation rate in ingredients for home-produced food of 36%….

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MPC and Inflation Forecasts

Readers Question: What are the monetary policy committee tools which are use to set the inflation target? The inflation target is set by the Government. The government set the inflation target at CPI 2% +/-1. If the inflation rate moves away from these targets the MPC have to write a letter of explanation to the chancellor. Inflation Forecasting. A very important job of the MPC is to try and forecast future inflation. Future inflation trends determine how and when they change monetary policy. For example, if they forecast a fall in the…