1.2.5 Inflation Presentation Homework

Inflation - Bobbi Hadgraft

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What is inflation?

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Inflation is a general rise in prices and is measured by the annual percentage change. As inflation rises, every pound you own buys a smaller amount of goods. When prices rise, and alternatively when the value of money falls, you have inflation.  

Why is inflation a problem for people?

Low-income families may face the inability to afford necessities and pay bills due to a lower real income, especially due to pay cuts/freezes. High inflation may need to be controlled by increasing interest rates to encourage people to save. This could lead to unemployment - as luxury goods companies face falling demand and have to make workers redundant to reduce costs - and also existing borrowers will face higher repayments on loans - for instance - and thus have a lower discretionary income.

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How has it changed over the last 5 years?

The Consumer Prices Index (CPI) climbed to 3%, a level it last reached in April 2012, and up from 2.9% in August.  The pick-up in inflation raises the likelihood of an increase in interest rates - currently 0.25% - next month. (As of October 2017) The fall in the pound since last year's Brexit vote has been one factor behind the rise in the inflation rate, as the cost of imported goods has risen.

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How does high inflation trouble businesses?

Costs & Prices It increases the average cost of raw materials. It increases FC such as loan repayments if interest rates are increased to tackle inflation.  Costs of wages may increase due to pressure from staff facing a decrease in their real wages. If people's discretionary incomes are lower, businesses may face reduced revenues and find it harder to break even as consumers are less likely to invest. They will likely move towards inferior goods.

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Uncertainty & Planning Volatile inflation means businesses are unsure of the value of their future costs, and will find  planning very difficult. This may lead to reduced investment and lower growth in the economy overall. Consumers will also face future uncertainty, thus spending less and causing firm's revenues to fall.

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Pay Demands Employees will demand pay rises as they look to protect their real incomes. This will lead to a rise in fixed costs and businesses may face reduced margins.  They may also be forced to make some staff redundant because of this, increasing unemployment.

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International Competitiveness Countries with  higher inflation rates than others for a considerable period of time will have less price competitive exports on offer in world markets. This could lead to reduced export orders, lower profits and higher unemployment.  This could decrease a country's GDP and lead to a slowdown or recession.

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