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56-handout - 01/11/2010 Causes & Effects of Inflation...

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01/11/2010 1 Causes & Effects of Effects of Inflation A2 Economics, November 2010 Causes of inflation • Inflation is a sustained increase in the general level of prices • There are many possible causes of price inflation in an economy – for example 1. Demand and supply-side causes 2. Inflation from internal and external sources 3. Inflationary effects of government / regulatory intervention in the economy • Average rates of inflation vary widely across the world across countries at different stages of development
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01/11/2010 2 The consumer price index (CPI) Annual % change in the Consumer Price Index UK Consumer Price Inflation 5.0 6.0 5.0 6.0 1.0 2.0 3.0 4.0 Percent 1.0 2.0 3.0 4.0 CPI Inflation target = 2% Source: UK Statistics Commission 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 -1.0 0.0 -1.0 0.0 Mapping the main causes of inflation in the UK Import Prices Basic Pay Bonuses + overtime Exchange rate / Profit margins Earnings Productivity Unit labour costs Commodity Prices Taxes Rate of inflation Global Economic Cycle + = + + Profit Margins Secular Influences (e.g. ICT impact, quality of education) Economic Cycle Economic Cycle Fiscal Policy +
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01/11/2010 3 Demand-pull inflation • Demand – pull inflation – When there is excess demand for goods and – When there is excess demand for goods and services – Positive output gap (where actual GDP > Potential GDP) – Businesses respond by raising prices to increase profit margins – Demand-pull inflation associated with boom phase of the cycle (SRAS becomes inelastic) – Root causes of demand pull inflation are usually monetary in origin (excessive lending / growth of the money supply – monetarist causes) Main causes of demand pull inflation • A large depreciation of the exchange rate A reduction in direct or indirect taxation • Rapid growth of the money supply as a consequence of increased bank and building society borrowing • Rising consumer confidence and an increase in the rate of growth of house prices Faster economic growth in other countries Faster economic growth in other countries – providing a boost to UK exports overseas
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

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56-handout - 01/11/2010 Causes & Effects of Inflation...

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