Inflation in the UK
In 1997 The Bank of England attained independence and thus UK inflation has been close to the target of government i.e. 2% +/-1. It is considered as the significant improvement for the economy of UK because earlier UK economy faced constant high inflation. The inflation in 1979 was 25% while in 1992 it reached 11%.
There are some reasons for low inflation in the UK. These are:
1. There has been more stable and predictable economic growth and the MPC do not want a boom in the economic cycle. Therefore when there is first sign of increasing inflation, they also increase the interest rates so that it reduces the inflation rate before it occurs.
2. As a result of the great credibility of MPC the expectation of inflation gets lower. Because of this the wage demands have been correspondingly lower. In this way the inflation remains low.
3. The cost is reduced and also there is competitiveness in the global market just because of the process of globalization. The falling prices of manufactured goods give benefit to the UK and keep the inflation low.
4. The improvement in technology like internet or micro chips also helped in increasing efficiency and thus reduced the costs.
5. The increased immigration has created new supply of cheap labour which therefore helps in keeping the wage pressure low.
6. Since the quantity of exports is lower and imports are cheaper, it helps in reducing the inflation.
However there are chances for an increase in inflation in the future. There is no reason for the continuation of the stability of past period and low real interests rate. There are several reasons that may cause inflation to rise.
1. The high demand for commodities in India and China because of economic growth. It therefore results in rising of prices which push inflation.
2. Since there is deficit in large current account in UK, therefore in order to reduce this deficit it is necessary to devaluate the value of £ at some point.
3. There may be the need of too much supply of labour which therefore increases the wage inflation.
4. There is continuous rise in UK House prices. It therefore makes additional consumer wealth and thus increases the consumer spending.
