inflation
Current UK Inflation Rate
CPI inflation rate: 2.6% (headline rate) CPI – D7G7 at ONS
(page updated 18 July 2017)
Source: Raw data General inflation tables | CPI annual % change D7G7 at ONS
Other measures of inflation
(CPIH) CPI including owner occupiers’ housing costs – 2.6% (CPIH – L550)
Factory gate prices (Output prices) 3.3% June 2017 (output prices) ONS
See: Measures of inflation
Cost push inflationary factors
In 2017, UK has seen a…
Readers Question: Why is it that the value of the exchange rate falls when there is higher inflation?
How inflation affects the exchange rate
A higher inflation rate in the UK compared to other countries will tend to reduce the value of pound because:
High inflation in the UK means that UK goods increase in price quicker than European goods. Therefore UK goods become less competitive. Demand for UK exports will fall, and therefore there will be less demand for Pound Sterling.
Also,…
A look at the extent to which policy makers face a trade off between unemployment and inflation. The Phillips curve suggests there is a trade off between inflation and unemployment, at least in the short term. Other economists argue the trade off between inflation and unemployment is weak.
Theory behind the Unemployment – Inflation trade off
If the economy experiences a rise in AD, it will cause increased output.
As the economy comes closer to full employment, we also experience a rise in inflation.
However,…
Deflation is defined as a fall in the general price level. It is a negative rate of inflation.
It means the value of money increases rather than decreases.
Deflation is not necessarily bad, but often periods of deflation / low inflation can lead to economic stagnation and periods of high unemployment. This is because deflation can discourage spending because things will be cheaper in the future. Deflation can also increase real debt burdens – reducing the spending power of firms and consumers.
Since the 1970s, we have seen a fall in average global inflation rates. There have been periods of inflation (often due to rise in oil prices), but the overall trend has seen much lower inflation rates. In the 1970s, inflation was seen as one of the main macro-economic challenges, but now many feel the challenge is that inflation has become too low risking deflation.
Global inflation shows a marked fall since 1977.
The spike in inflation…
Readers Question: How can a developing country grow without inflation?
Economic growth can lead to inflation, for example, if demand rises faster than productive capacity, then we will see rising prices.
However, economic growth is compatible with low inflation, and developing economies which can increase productive capacity and general efficiency can see rising living standards without excessive inflation.
Economic growth without inflation
A simple model to show economic growth without inflation is to show LRAS (long run aggregate supply) increasing at the same rate as aggregate demand (AD)
Readers Question: Why is cost of living in UK so expensive?
The cost of living depends on:
The price of basic necessities – food, fuel, heating, transport, housing / rent, entertainment.
The effective cost of living also depends on real wages. It is expensive to live in Nordic countries, but real wages tend to be higher. For items, such as eating out – the US is often cheaper than many European countries, but Americans need to spend much more on private health care insurance.
Summary – Why is the UK so expensive.
The biggest…
In the UK, CPI inflation has fallen to 0%. Is this a cause for celebration or a cause for concern?
Firstly the government set an inflation target of CPI 2% +/-1 for good reasons. The fear is that if inflation is too low, we may start to get problems associated with deflation. More details here About the problems of deflation. But a quick summary:
Rising real value of debt. With low inflation, it becomes harder than expected for people to pay back…
