The Bank of England Monetary Policy Committee (MPC) is responsible for setting interest rates and trying to achieve a target rate of inflation. Until 1997, the government set interest rates and monetary policy. But, it was felt that the government might make bad decisions because they would be influenced by short-term political pressures. Therefore, they …
UK interest rates were last raised over a decade ago – July 2007, but it is widely expected that this week the MPC will vote to raise base interest rates from their current low of 0.25%. The logic for an interest rate rise is that – inflation (3%) is above the 2% target, fall in …
A devaluation leads to a decline in the value of a currency making exports more competitive and imports more expensive. Generally, a devaluation is likely to contribute to inflationary pressures because of higher import prices and rising demand for exports. However, the overall impact depends on the state of the economy and other factors affecting …
A key factor in determining inflation is people’s expectations of future inflation. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher …
Definition of disinflation Disinflation is a fall in the inflation rate. It means that the general price level is increasing at a slower rate. When people talk of disinflation, they often mean a period of low inflation. For example, inflation falling below the inflation target of 2%. Between 2011 and 2015, there is a fall …
Readers Question: Is rise in prices a reflection of economic growth? A sustained rise in prices is known as inflation. A large rise in prices / higher inflation rate is often caused by economic growth. However, there are also occasions, when we can get inflation despite weak or negative economic growth. Inflation caused by economic …
Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply. Narrow Money e.g. M0 = This is the level of notes and coins …
Readers Question: How does an increase in imports cause inflation in the economy? If the quantity of imports increases, this should reduce domestic demand-pull inflation (AD = C+I+G+X-M). Therefore if consumers spend more on imports it will, ceteris paribus, reduce domestic demand. Therefore, we get lower growth of AD and lower inflation. Suppose there is an …