IMPORTANCE OF CONTROLLING INFLATION
REMEMBER: Low and stable rate of inflation helps to create a healthy economy.
The Government sets a target for how much prices overall should go up each year in the
UK. That target is 2%. It’s the Bank of England job to keep inflation at that target.
▪High levels of inflation can be harmful to the economy
▪ If prices are unpredictable, it is difficult for people and firms
to plan how much they can spend, save or invest.
▪ Inflation decreases the purchasing power of money
▪ Impacts on household incomes (living standards fall)
▪ Impacts on whether firms invest (reduces the return on investment)-
this impacts on economic growth
▪ Impacts on international trade- exports become less competitive
and imports more attractive to domestic firms
▪ If not controlled, it can spiral and become a persistent problem
3/30/2023 15
, CONSEQUENCE: LIVING STANDARDS FOR HOUSEHOLDS
ESPECIALLY THOSE ON FIXED INCOMES AND LOW INCOMES ARE
LIKELY TO FALL.
When inflation is increasing, the cost of living increases.
This means that households have less money to spend
on the same amount of goods and services as their
purchasing power falls
For those on fixed incomes (pensioners) and low income
earners, they may have to buy less and for some they
may not be able to pay their bills
This means that living standards fall. Poverty can
increase and debt levels may also increase as a
consequence.
Consumption falls and therefore AD slows or falls
3/30/2023 16
REMEMBER: Low and stable rate of inflation helps to create a healthy economy.
The Government sets a target for how much prices overall should go up each year in the
UK. That target is 2%. It’s the Bank of England job to keep inflation at that target.
▪High levels of inflation can be harmful to the economy
▪ If prices are unpredictable, it is difficult for people and firms
to plan how much they can spend, save or invest.
▪ Inflation decreases the purchasing power of money
▪ Impacts on household incomes (living standards fall)
▪ Impacts on whether firms invest (reduces the return on investment)-
this impacts on economic growth
▪ Impacts on international trade- exports become less competitive
and imports more attractive to domestic firms
▪ If not controlled, it can spiral and become a persistent problem
3/30/2023 15
, CONSEQUENCE: LIVING STANDARDS FOR HOUSEHOLDS
ESPECIALLY THOSE ON FIXED INCOMES AND LOW INCOMES ARE
LIKELY TO FALL.
When inflation is increasing, the cost of living increases.
This means that households have less money to spend
on the same amount of goods and services as their
purchasing power falls
For those on fixed incomes (pensioners) and low income
earners, they may have to buy less and for some they
may not be able to pay their bills
This means that living standards fall. Poverty can
increase and debt levels may also increase as a
consequence.
Consumption falls and therefore AD slows or falls
3/30/2023 16
