Readers Question: What influences consumer spending Consumption is financed primarily out of our income. Therefore real wages will be an important determinant, but consumer spending is also influenced by other factors, such as interest rates, inflation, confidence, saving rates and availability of finance. Interest Rates – Interest Rates influence the cost of borrowing and mortgage …
Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed target (usually around 2%). Since the mid-1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and the Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods …
Readers Question: What is the relationship between inflation & economic growth? If economic growth is caused by aggregate demand (AD) increasing faster than productive capacity (LRAS) – if economic growth is above the ‘long-run trend rate‘ then economic growth is likely to cause inflation. If economic growth is caused by increased productivity (LRAS), then the …
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 …