Inflation

            Inflation is defined as a sustained rise in the general price level. When the inflation figures' come out once a month and are quoted on the news, the newsreaders give certain percentage rates of inflation'. Shoe-leather costs. This refers to the time wasted searching the market place for the lowest price. This is much harder when inflation is high. High inflation tends to coincide with variable inflation and, therefore, very unstable prices.
             Unanticipated inflation causes uncertainty. The amount of money that firms invest in new machinery is likely to be lower in times of high inflation because it is difficult for the firms to be confident that the investment will be worthwhile. Lower investment means lower aggregate demand and a lower future productive potential.
             Lower investment will lead to lower growth in GDP. Also, at times of high inflation, the Monetary Policy Committee are likely to raise interest rates in an effort to deflate the economy and reduce the inflation rate. Higher interest rates will result in firms investing less, consumers spending less and the value of the £ rising, which is bad for exporters.
             Cost push inflation is associated with rises in the costs of an industry, or the economy generally. The main reasons why costs might rise are increases in wages and salaries (the biggest cost of production economy wide); increases in the cost of raw materials; increases in the price of imported goods (either as finished goods, semi-finished manufactures or raw materials) due to a fall in the value of the £ or price rises in the country of origin; increases in indirect taxes (or reductions in government subsidies).