Readers Question: Discuss whether a widespread shortage of labour might be a major cause of inflation. Often a shortage of labour causes inflationary pressure. If firms are struggling to employ sufficient labour, workers are in a position to demand higher wages. This can easily lead to wage inflation which causes inflation. Micro-theory of labour shortages …
UK inflation since 1989. Definition – Inflation – Inflation is a sustained rise in the cost of living and average price level. Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply. Costs of Inflation – Inflation causes …
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 …
Long-term economic forecasting can be very difficult. A well known joke by John Kenneth Galbraith is: “The only function of economic forecasting is to make astrology look respectable.” However, although there is some truth in this wisecrack, in the short term, we can be reasonably confident about predictions for inflation. In particular, if we see …
Readers question: Will a sustained recovery in the UK lead to inflation? A sustained economic recovery could lead to inflation. If economic growth is above the long run trend rate for a prolonged period, if demand grows faster than productivity, then in that scenario we are likely to see rising inflation (rise in the cost …
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 …
When food prices rise in the developed world, it is an inconvenience, something to grumble about. But, when food prices rise in the developing world, it can make a difference between going hungry and getting enough to eat. Food inflation is volatile. Agricultural prices tend to fluctuate because demand and supply are both inelastic and …
Readers Question: I was really hoping you might be able to inform me of the effects that zero inflation (which the UK is currently experiencing) might have on aggregate demand in the economy? Firstly, this post will help consider the impact of zero inflation on AD and economic growth – Is zero inflation a good …