Inflation Has Been More Subdued Than In

The 1970S What Are The Reasons For This And Will They Endure Essay, Research Paper

Inflation has been more subdued than in the 1970s. What factors explain this and are they likely to endure?

Inflation is a sustained increase in the general price level leading to a fall in the purchasing power of money. It is caused by two major groups of factors: The demand-pull factors, when the total demand for goods and services exceeds the total supply and the cost-push factors, when firms increase prices in order to maintain or protect profit margins.

Inflation in the British economy has over the last decade been more subdued than in the 1970s. This long period of low inflation has been brought about by various factors related to cost-push and demand-pull theory. At the start of the 1990s inflation was high (10.9% as measured by the RPIX) which had been brought on by an increase in aggregate demand and by firms trying to make more profit by passing costs on to the consumer. This high level of inflation was reduced by high interest rates at the end of 1990, as consumers were reluctant to borrow and therefore saved more allowing less spending. Along side these interest rates the global economy was also slowing which had a negative effect on inflation and also helped to bring it down.

The exchange rate was anchored to the low inflation German economy which caused a further dip in inflation because it encouraged British companies to keep their costs under control. The measure of unit labour cost inflation fell from 10 0.3 % in three years. Producers started to absorb costs instead of passing them on to the consumer. As a result of this, by the end of 1993, inflation fell to below 2%.