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Inflation

Inflation refers to a general and sustained increase in prices over time. It is measured using an , eg the Consumer Prices Index (CPI), which tracks how the price of a typical basket of items changes over time. The rate of inflation is usually stated as a percentage. An annual inflation rate of 2% means that a product that was priced at 拢1.00 last year will now be priced at 拢1.02.

The impact of inflation on consumers

Inflation reduces the of money since more money is now needed to buy the same items.

High rates of inflation mean that unless increases at the same rate, people are worse off. This leads to lower levels of consumer spending and a fall in sales for businesses.

Comparison showing percentage increase of 49% of the cost of a packet of crisps in 2010 to 2019, against the national minimum wage increases of 25% for the same period.

Question

The national minimum wage increased by 25% between 2010 and 2019. How does this compare to the percentage change in the price of crisps during the same period?

\(\text{Percentage Price Change} = \frac{\text{2018 Price - 2010 Price}}{\text{2010 Price}}\times 100\)

\(\text{Percentage Price Change} = \frac{\text{67p - 45p}}{\text{45p}}\times 100\)

\(\text{Percentage Price Change = 04889}\times 100\)

\(Percentage Price Change = 49% (to 0 decimal places)\)

The impact of inflation on businesses

To compensate for inflation, staff may ask for pay rises above the rate of inflation. This would lead to higher costs for businesses and could result in prices being increased further, adding to inflation.

Inflation also affects global businesses that trade overseas. If inflation is higher in the UK than it is elsewhere, then the UK鈥檚 goods become comparatively more expensive. This leads to a fall in the for the UK鈥檚 .