Cost-Push Inflation Firms respond to higher costs by increasing prices (AS shifts inward) AD AS AS 1 PL GDP Causes: ↑imported raw material costs ↑ labour costs ↑ indirect or direct taxes paid by firms

Demand-Pull Inflation AD grows faster than AS therefore prices are bid up by demand exceeding supply AD AS AD 1 PL GDP Causes: ↑ exports not matched by ↑ imports ↑ gov’t spending not matched by ↑ taxes ↓ interest rates → ↑ C ↑ wealth effect from ↑ house prices or stock market boom

Impact of inflation on consumers… PositiveNegative -Outstanding loans are worth less in relative terms – they are easier to pay back with ‘today’s’ money -Savers see the real value of their savings eroded -Constantly changing prices makes big purchases hard to plan for an execute – confidence is low Impact of inflation on workers… PositiveNegative -Seeing the figure on your payslip rise feels like progress -Workers may be made redundant as some firms struggle to pay higher wages -Some workers without good bargaining power may not see wages rise in line with prices – so worse off in real terms

Impact of inflation on firms… PositiveNegative -Outstanding loans are worth less in relative terms – they are easier to pay back with ‘today’s’ money -Menu costs – constantly changing the price of goods sold takes time and costs money -Consumer are more likely to ‘shop around’ as they get nervous about price rises (shoe leather costs) -If prices in the UK are rising faster than those abroad, UK firms will be less competitive and exports will fall. -Consumers get nervous about the future cost of living so may reduce consumption -Workers may become agitated about wage rises so may strike or take other industrial action -Firms may reduce investment with the uncertainty

Impact of inflation on gov’t… PositiveNegative -Outstanding loans are worth less in relative terms – they are easier to pay back with ‘today’s’ money -If the economy slows down, gov’t will have to pay out more in benefits and will receive less in tax revenue -The real value of excise duties will decrease unless they rise in line with inflation Overall economic impact… -High inflation is associated with economic uncertainty and decline -Decreased investment, consumption and exports from uncertainty and lack of confidence -Unrest can occur – politically or in workplaces – as workers worry that their wages may not keep up with the cost of living -A spiral of rising prices / wages / prices / wages can get out of control