Cost-Push Inflation Firms respond to higher costs by increasing prices (AS shifts inward) Causes: ↑imported raw material costs ↑ labour costs ↑ indirect or direct taxes paid by firms PL AS1 AS AD GDP

Demand-Pull Inflation AD grows faster than AS therefore prices are bid up by demand exceeding supply 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 PL AS AD1 AD GDP

Impact of inflation on consumers… Positive Negative 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… Positive Negative 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… Positive Negative 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… Overall economic impact… Positive Negative 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