Inflation

Question 1

Inflation

Answer 1

The increase in price
Measured by consumer price index

Demand-pull
- excess demand to supply
- can increase prices
- make profit margins go up

Cost-push
- wages rise so price goes up
- if don’t increase prices, profit margins fall

High inflation
- UK businesses become less competitive if they export as foreign competitors don’t increase prices
- spending increases temporarily due to panic
- if wages don’t go up spending falls as can afford less

Wage-price spiral
- prices go up so employees demand more then businesses increase their prices to cover the higher costs

Question 2

Impacts on strategy

Answer 2

Premium goods
- less to spend, look for cheaper alternatives
- may need to reduce price or heavily advertise

Expansion
- low cost businesses may decide to expand if interest rates are lower than the rate of inflation
- the benefits of interest are lower than the higher profit margins (due to price)
- this means it’s cheap to borrow (and have the money to repay)
- the interest earnt on savings is less than the increase in prices (should invest into machinery to improve sales volume)

However
- the bank of england often increases interest rates during inflation to encourage saving
- want to reduce spending so that businesses have to reduce their prices (as consumer would rather save money for high interest then pay high prices)
- bank does this to bring inflation to target (stabilise pricing and economy)

Inflation increases interest
- may change where they expand
- when UK rates are high they’re likely to expand to other countries with low and stable rates