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Discuss the consequence of a rise in the rate of inflation

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Introduction

Discuss the consequence of a rise in the rate of inflation Inflation is a continuous and sustained rise in the average price level. It is a process of prices rising. It includes wholesale and factor prices. The target rate for inflation in the UK is two percent; the government's aim is to achieve this target rate. Inflation can be measured using several methods including retail price index (RPI). The result can be obtained from making a price survey out of selection of goods and services that are demanded by average families. These goods and services are also known as basket of goods. An average of 650 goods and services are chosen from the families' consumption pattern through the country. The data is collected on monthly bases for accurate information and the price will be determined depending on the expenditure on these goods by those who consume them. ...read more.

Middle

There are other factors that could increase inflation such as increase in consumer confident and rate of house prices. High inflation can case damages to the economy. It may even turn into hyperinflation which cases a wage spiral to develop. Increase in prices of the goods and services can case a demand for pay rise; this would automatically case inflation as the companies try to cover the extra cost by passing it into the costs of products and services they sell. If the cycle keeps on continues then the inflation will keep on rising. The demand for goods and services also has an effect on the inflation. With fast inflation people will demand for goods and services now before the prices goes up, trying to avoid the extra costs they have to pay for the same product. ...read more.

Conclusion

Besides, inflation may drive people into large depths as they struggle to cope up with the higher prices e.g. increase in price of fuel, food and mortgage interest rates. Projects such as Olympic, school buildings and transport improvements may exceed the government's budget and may cost budget deficit. Fast inflation will case menu costs and administrative costs. This is because the firm have to keep on adjusting the catalogues and advertisements. It would be hard for them to make right decisions and make any predictions because of the price keeps on changing. The unstable inflation may make them think that they are doing well forgetting that the employees also demanding for wage rise. Peoples on the other hand thinking that their wages are rising and may take loan out of their banks and they will end up struggling to pay the debit as the Bank of England put up the interest rates up. ?? ?? ?? ?? Vivek Santhirababu 1/03/09 ...read more.

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The writer ignores the fact that different groups may do better or worse in times of inflation. Borrowers do well, savers do badly as the true value of their savings fall. There are some benefits to a little inflation as it allows for adjustment of prices and wages (they are unlikely to fall otherwise)

Marked by teacher David Salter 12/02/2012

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