 Inflation occurs when there is a general rise in the price of goods in the whole economy  Not every price will be rising, but average prices will  Consumer Price Index (CPI) measures average prices in the UK

 Inflation damages business as it creates uncertainty  A rise in inflation reflects a rise in in business costs, e.g. increased wages, cost of materials, cost of fuel & energy  Choice: › Keep prices constant and see profits fall › Raise prices and risk losing out to competitors

 Cost of credit is the rate of interest  Expressed as a percentage  Example:  A business borrows £1,000 for a year at 5% interest rate  It pays back £1,050 as £50 is 5% of £1,000

 Rising interest rates harm business profits as they create extra costs  The Monetary Policy Committee (MPC) determines interest rates  It votes to determine the Bank of England interest rate each month (majority decision)  The interest rate was kept low during the recession to make it easier for businesses to get credit

 Wage bill is often 70% of a business’s costs  Growth – can result in labour market shortages & rising wages  Recession – easier to obtain labour

 Government responsible for managing the economy  Good management = › Stability & growth › Low inflation › Available credit & low interest rates › Access to suitable labour

 Research the following terms and find out what they are/mean: › Monetary policy › Quantitative easing › Fiscal policy