Inflation

Inflation - A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services.

Over the long term, inflation erodes the purchasing power of your income and wealth.

That means that even as you save and invest, your accumulated wealth buys less and less.

How to measure Inflation

• Every month the Government surveys prices and generates the current consumer price index (CPI)
• This allows you to compare current figures with past figures

Causes of Inflation

Inflation results when the macro economy has too much demand for available production.

Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to purchase more output than the economy is capable of producing.

Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to increases in production cost

Inflation and Business

• Inflation may lead to a decrease in sales for businesses
• When there is high inflation it is hard for business to remain competitive especially with overseas firms

Inflation and Government Policy

Governments try and control inflation using the following tools:

• An increase in interest rates
• Legislation reducing trade union power
• Reduced expectations of inflation allowing businesses more confidence when setting prices

Recent Years

In recent years inflation has been low, this means:

• Cost are easier to control
• Pricing strategies are easier to establish
• If UK inflation is lower than other countries gives UK firms a competitive advantage
• Sales forecasts will be more accurate