1. 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

2. 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

3. 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

4. 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

5. 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