Ib        Macroeconomics

Low inflation over the past decade

Introduction

The last ten years has produced the lowest average level of inflation for decades which has been fantastic for the UK economy. This report will elaborate on what we mean by inflation as the persistent increase in the price levels in the economy and will also be looking at the causes of inflation such as demand-pull inflation, cost-push inflation, and expectations of inflation. All with the knowledge that inflation is a macroeconomic problem faced by nations. Measuring inflation as the rate of inflation annually is also explained.

In assessing why inflation has been so low we shall look at the various scenario that have helped keep inflation low such as tight margins in the distribution sector, fall in domestic and imported goods prices, and the use of policies by the government to control inflation. Such policies include fiscal policy, monetary policy, inflation targeting, and supply side policy.

The main inflationary pressures in the economy have also been outlined like the rising oil prices, the rising food prices and the rapid economic growth. The economic effects of high levels of inflation are included to explain the cost of inflation such as redistribution of income and reduced economic growth.


Economics and Macroeconomics

Economics as I know is the social science which deals the production of goods and service with variables and statistics involved and the consumption of goods and services also with there variables and statistics. Macroeconomics then deals with the economy as whole rather than individual activities; it deals with the economic aggregates such as the level of output, prices and unemployment in the economy. The UK stable economic environment can be affected or stimulated by fluctuations in the economic activities and macroeconomic variables such as economic growth, unemployment, inflation and the balance of payment at unacceptable levels.

Macroeconomic problems

Economic growth, inflation, unemployment and the balance of payment are macroeconomic problems that the UK encounters both past and present leading to macroeconomic objectives by the government. Primary to control the variables and create a flourishing economic environment because experience from the bad old days now shows that controlled and stable variables like inflation aids the process of economic decision making. Business setting prices, wages and investment decisions being made more confidently are decision making processes.

Inflation outlined

Inflation can be explained as the sustained and ongoing process with price levels on the increase through out the UK economy the value of the pound on the decrease. This results in the consumers requiring more money to purchase the same goods and services. Inflation occurs over a period of time meaning a one time jump in the level of prices does not reflect inflation. The increase in the price level in the economy must be persistent for to be termed as experiencing inflation. There is always inflation so when there is a rapid increase in prices it means a rise in inflation and a sluggish increase in prices signifies a fall in inflation.

Rate of Inflation

Inflation is monitored and has to be measured, that is the rate of inflation which measures the annual percentage increase in prices on average in the economy.

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Sloman (2007:317) states that: the rate of inflation measures the annual percentage increase in                                    prices. The usual measure is that of consumer prices. The                                            government publishes a consumer price index (CPI) each month,                                    and the rate of inflation is the percentage increase in that index                                    over the previous 12 months.

Commodity prices, house prices, food prices, prices after excluding taxes and many others have indices measured then published to calculate the respective rates of inflation. The Retail Price Index (RPI) is a major example which is based on the current retail prices of a basket of ...

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