Macroeconomic Policies of UK Government in Achieving Objective of Low Inflation - Essay Example

Discuss how the UK government tries to achieve macroeconomic objective of low inflation It is every government’s responsibility to attain positive macroeconomic elements in the economy, and the United Kingdom’s government is no exception. The United Kingdom has always strived to ensure that there is low inflation, low unemployment levels, high rate of economic of economic growth, and equilibrium in balance of payment. The subsequent paragraphs concentrate on the efforts and measures put in place by the United Kingdom’s government to tackle inflation. It is worth noting that inflation takes various forms. These include wage inflation, cost-push inflation, sectorial inflation, demand-pull, and pricing power inflation. Demand-pull inflation is a type of inflation that is caused by excess demand of good and services in the economy, which causes the prices of goods, and services to soar up. On the other hand, cost-push inflation is a form of inflation that is caused by increased cost of production. Such increased cost of production compels producers to pass the cost to consumers in terms of high prices (Pierson 20). On the other hand, wage inflation is occasioned by the fact that as people are paid more salary, their disposable income increases. With an increase in disposal income, an increase in purchasing power is inevitable. The consumers tend to spend more in such circumstance leading to increase in the prices of goods and services. It is worth noting that there exists several levels of inflation, which includes mild inflation, moderate inflation, hyperinflation, and stagflation. Mild inflation is good for the economy; in fact, this is the primary objective of the United Kingdom’s government. The government intends to achieve a low inflation rate of not more than 3%. Maintaining low inflation is not an easy fete to achieve. Inflation is measured as the yearly rate of change in the retail price index. In order to achieve price stability, the rate of inflation should be zero. This is only theoretical and cannot be practical in the real economy. Some level of inflation is good for the economy as it signifies growth in the economic performance besides showing that owners of factors of production are being rewarded for their investment efforts. Mills argue that the United Kingdom has over the years had elaborate strategies to counter high inflation; the strategy targets the underlying rate of inflation (112). This strategy is justified because besides helping to control the level of inflation, it is also instrumental in checking the interest rate and the retail price index. In a bid to maintain a low level of inflation, the government has to contend with the unemployment in the economy. Currently, the rate of unemployment in the United Kingdom is 7%, while the inflation rate is 2.7% (Gordon 220). This rate of unemployment is not badly off as it shows that United Kingdom’s economy is at near full employment. High unemployment levels have adverse social and economic cost to the economy. Unemployed have low purchasing power, hence the rate of consumption is low (Gordon 220). The other characteristic of unemployed is that unemployed people lose their skills and morale with time; hence becoming less productive in the economy. The government is obliged to incur extra public expenditure to provide social benefits to the unemployed population. Finally, the adverse effect of high employment rate is that it results in increased cases of social evils such as crime, prostitution, and vandalism. In a bid to cushion the economy from inflation, the United Kingdom’s government permits some level of inflation in the economy. Striking a balance between inflation and unemployment brings about the concept of Philips's curve. Philips curve suggests that there exists a tradeoff between inflation and unemployment. As the UK government tries to thwart inflation, the rate of unemployment also goes up as shown in Figure 1. This is the case because the two macroeconomic elements have opposing fiscal and monetary policies that are used to fight them. Inflation requires contractionary economic policies while unemployment requires expansionary fiscal policies. During high inflation, the government is forced to reduce public expenditure and increase the interest rate to reduce the money supply in the economy, consequently resulting in low inflation levels. However, when the government reduces the amount of public expenditures or the interest rate, the level of employment will go down. This opposing tendency between inflation and unemployment compels the government to strike a balance by ensuring that there exists some level of inflation and unemployment in the economy (Gandolfo 251). The most practical level of inflation and unemployment should be 3%; this scenario means that the economy is at near full employment, and the prices of goods and services are stable judging by the consumer index price. Figure 1: The Philips Curve In discussing inflation in the United Kingdom’s context, the issue of economic growth cannot be overlooked. Economic growth is measurable in terms of the rate of change in the GDP (Gross Domestic Product). The use of the word real signifies that the effect of inflation on the economic growth of the United Kingdom has been removed (Friedman 123). In the year 1999, the UK GDP growth registered a rate of 1.8%. This is low level of inflation by any standards, and it can be attributed to the economic downturn that had greeted the economy at that time. During such period, the rate of inflation in the economy is usually high. In fact, in the same year, the rate of inflation in the United Kingdom was at 7% (Friedman 123). The bank of England is responsible for ensuring that UK’s economy attain sound macroeconomic levels in terms of price stability, full employment, economic growth and equilibrium in the balance of payment. In order to attain this, the bank has put in place a raft of monetary and fiscal policies that are used to attain their macro-economic objective. The UK government targets an inflation rate of 2.0%. This inflation rate is well balanced with the unemployment level, which is pegged at 3%. Friedman says that currently, the unemployment level is at 7% and the inflation rate in UK is at 2.7% (123). This level falls way below the target set by the government as inflation target rate and unemployment target rate respectively. The various policyholders in the economy should aggressively implement the various monetary and fiscal policies to ensure that the economy of UK attain this target. Attainment of these objectives goes a long way to ensure that the social and economic costs on the government are reduced significantly. Works Cited Friedman, Benjamin M. The Moral Consequences of Economic Growth. New York: Knopf, 2005. Print. Gandolfo, Giancarlo. Elements of International Economics. Berlin: Springer, 2004. Print. Gordon, Robert A. The Goal of Full Employment. New York: Wiley, 2007. Print. Mills, Frederick C. Prices in Reccession and Recovery. New York: NBER, 2006. Print. Pierson, John H. G. Full Employment. New Haven: Yale University Press, 2001. Print. Read More