The economic

environment
Inflation
 • Can be defined as the persistent rise in the
price level of goods and service. Resulting in
Inflation a fall in the value of money.
• Inflation becomes a major problem for
countries when it is rising rapidly (high rates)
 • The UK govt. measures inflation using
the CPI (Consumer Price Index)
• It measures the average monthly change
How is in the price of goods and services
purchased by households in the UK
inflation • The govt will use this to set targets for
measured? the future.
• The CPI is calculated using more than
650 separate goods and services for
which the price changes are measured
throughout the country.
 1. Cost push inflation
The causes 2. Demand- pull inflation
of inflation
 • Occurs when firms face
increasing costs due to factors
such as rising wages or raw
material costs
• This type of inflation can arise
Cost- push from several sources:
inflation
- Wage rises
- Imported inflation
 • Occurs when the demand for the
country’s goods and services exceeds
its ability to supply these products.
• Thus, prices rise as supply cannot meet
Demand-pull the increase in demand
• Normally occurs during the boom stage
inflation of the business cycle as the economy is
operating at full capacity and is unable
to produce output either due to:

- Less available resources

- Labor is scarce
 • Businesses may suffer from
falling sales as consumers will
The impact have to spend mor to obtain the
same quantity of goods as before
of inflation
on • It can be difficult to maintain
businesses competitiveness (international
competitiveness) as costs are
rising.
 • Rises in interest rates:
- This discourages borrowing in a country as it

The impact of increases the cost of borrowing

- Demand- pull inflation can be managed/controlled

govt. anti- - Businesses reduce investments as borrowing

become expensive

inflationary - Output and sales decline thereby reducing

inflationary pressure

policy • Reducing the expectation of inflation:

- Helps increase business and consumer confidence
- Helps persuade foreign firms to invest in the country

• Restricting the power of trade unions (to control

cost-push inflation)