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…

dinsinflation-cpi-inflation

Disinflation – definition and meaning

Definition of disinflation Disinflation is a fall in the inflation rate. It means that the general price level is increasing at a slower rate. When people talk of disinflation, they often mean a period of low inflation. For example, inflation falling below the inflation target of 2%. Between 2011 and 2015, there is a fall in the UK inflation rate from 5% to 0%.  This is a period of disinflation. It was caused by A fall in the costs of production – falling commodity…

UK Inflation Rate and Graphs

UK Inflation Rate and Graphs

Current UK Inflation Rate CPI inflation rate:  3.1% (headline rate) CPI – D7G7 at ONS (page updated 17 Dec 2017) Source: Raw data General inflation tables | CPI annual % change D7G7 at ONS Other measures of inflation (CPIH) CPI including owner occupiers’ housing costs – 2.8% (CPIH – L550) RPI – 3.9% (Nov 2017) Factory gate prices (Output prices) 3.3% June 2017 (output prices) ONS See: Measures of inflation Cost-push inflationary factors In 2017, UK has…

Inflation and Exchange Rates

Inflation and Exchange Rates

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, UK consumers will find it more attractive to…

Trade off between unemployment and inflation

Trade off between unemployment and inflation

A look at the extent to which policymakers 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. Why is there a trade-off between Unemployment and Inflation? 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, with the increase…

Is zero inflation a good thing?

Is zero inflation a good thing?

There are various economic costs associated with inflation – uncertainty, decline in investment, redistribution from savers to borrowers – but although there are costs with inflation, is zero inflation actually desirable? Governments usually set an inflation target of around 2%. (UK CPI target is 2% +/-1) There are reasons for targetting inflation of 2% – rather than inflation of 0%. The fear is that to achieve inflation of 0% may require lower economic growth and cause problems associated with deflation (falling prices) Potential…

Why is cost of living in UK so expensive?

Why is cost of living in UK so expensive?

Readers Question: Why is cost of living in the 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…

Velocity of circulation and inflation

Readers Question: When does velocity of money pick up and why will it? Clearly, the reason US inflation worriers have been wrong so far (NB). Is it confidence or policy? The velocity of circulation / velocity of money refers to how frequently the money stock in an economy is used in a given period. In the basic money supply equation, we have MV=PY M= Money supply V = Velocity of circulation P = Price Level Y = Income (in other versions, T also used for transactions) If there is £1,000bn of money…