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Problem of the Inflation in The UK Economy - Essay Example

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This essay mainly focused on the concept of U.K‘s inflation rate, its fluctuation in the economy and its effects on different sectors. The inflation can be described as the process of persistent of rise in prices of goods and services, that translates into fall of the purchasing power…
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Problem of the Inflation in The UK Economy
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Download file to see previous pages sis, prices were rising at a yearly rate of 5%.According to CPI measure, less than a year later prices were rising by 1% and falling by about RPI measure on the other hand (Economic Tracker, Inflation, June 18, 2013). Causes Increase in private and public expenditure, increase in consumer spending, reduction in taxes, repayment of old internal loans, growth in population, increase in exports and deficit financing are the main causes in rise in demands for gods and services. Industrial disputes, shortage of factors of production, natural calamities and hoarding of goods are considered to be the main causes of decrease in the supply of goods and services. This phenomenon of inflation incorporated in the U.K’s economy was really a big swing that really caused some transformation within the country. The transportation cause was high due to interpolation of high oil prices resulting into upraised prices of products and thus high household energy bills. Food prices were enormously high due to the rise in subsequent rise in oil prices, which makes fertilizer and power much more expensive and costlier. The other causes are droughts, rising demand from emerging economies, and land being used for bio-fuel. The cost of imported goods bounced up due to the fall in sterling. By the early 2009, the price of crude oil has collapsed in just six months as it loosed two-thirds of its value. The world-wide recession had taken hold, which implies that there was less demand for fuel to power factories, transport good for the availability of shopping and to get the staff and worker to work. In the UK’s , another major reason for the inflation rate to be lower in-between the phase of 2008-09 was carving of VAT from 17.5% to 15% that was introduced to shoot up spending. The RPI measure...
The essay mainly concentrates on the nature, cause and its impact of inflation in U.K’s economy and outlines the remedies, that should be proposed thereon for the abatement of the threat of the inflation. The inflation rate is explained with the help of AS-AD (Aggregate demand-Aggregate supply model) by John Maynard Keynes.
There are two factors mainly working in the economy, i.e. the Cost-push inflation and the Demand-pull inflation ( factors for hiked price level marked with a high supply and lower demand level). The Cost-push inflation is generally there to lower the aggregate supply(short run) and the Demand-pull inflation is mainly to increase the level of demand in the economy.
There are three side policies to tackle the inflation problem : demand side, supply side and exchange rate policies to check for inflation. The demand side policy can be two types of fiscal policy such as deflationary fiscal policy (increase in taxes and lowering of government spending) and deflationary monetary policy (rising of interest rate and reducing money supply). Supply side policies involve all the policies, that improves the efficient supply of all goods and services including privatization, training and education given to workforce, increase in industry competition.
If the economy is deeply affected by inflation, the economic impact can be sub-divided into two major parts, i.e. its impact on productivity and impact on distribution of wealth. If inflation creeps in economy it has a positive impact as the price level increment is small.
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