Commentary:

This article highlights the unexpected increase in inflation in UK, observed after comparing
inflation rates between in last 3 months.
Stable and low inflation as well as high and stable growth is two main macroeconomics
objectives that government always trying to achieve. Growth is an increase in real level of
output and inflation is a situation where price rate of goods and services increases, and
subsequently disposable income of people decreases. These two main objectives are
generally get across with regard to monetary policy. So on this stage, Federal Reserve of
England must determine whether to increase interest rates to achieve %2 goal or lower
interest rates in order to incentive aggregate demand. Aggregate demand is the total
demand on goods and services at a given time and price level.
The current rate of inflation in the UK is also mainly pushed higher by petrol prices. Hence,
this is the example of cost push inflation because since petrol is used in the production or
transportation of almost all sectors of nations economy, increase in petrol prices will lead to
increase in cost of production and therefore Aggregate Supply curve will shift upwards.
Aggregate supply is total amount of good and services produced at a given time and price
level.
Figure 1: Cost push inflation in the AD/AS model.













Avarage price Level ()
National Output (Real Gross Domestic Product)
SRAS
1
(Short Run Aggregate Supply)
P
2
P
1
Y
2
SRAS
2
Y
1
AD(Aggregete Demand)

LRAS(Long Run Aggregate Supply)

Increased
cost of
profuction

%0.2



So this inflation causes to increase average level of price (P
1
to P
2
) and therefore decrease in
real output (Y
1
to Y
2)
. This situation is called stagflation where inflation with negatively
growth occurs.
Also as stated in article increase in inflation rate is higher than increase in wage rate. So this
means that workers who are not financially aware of this situation will cause money illusion.
Money illusion refers to tendency of people to think value of their money according to price
of goods or services that they see around them regardless of inflation occurring.