Reasons for Low inflation in UK
Demand side Factors
- Economic growth hasclose to long run trend rate, therefore, avoids inflationary pressure.
- Role of MPC in maintaining inflation close to government's target of CPI 2%. For example, MPC have increased interest rates 4 times in the past 18 months to reduce inflationary pressures.
- High Exchange Rate. This makes exports more expensive and therefore reduces export volumes.
- Diagram could involve a simple AD/AS framework with AD increasing at same rate as AS
Supply side factors
- Improved technology, which helps to reduce costs
- Supply side policies
- More flexible labour markets, less wage bargaining. Wage inflation lower (also effects demand pull inflation)
- Long period of economic expansion. This has created jobs. Draw a simple AD / AS diagram showing an increase in AD and Real GDP
- Sustained economic growth and low inflation creates a positive environment for encouraging investment, this has led to increased job opportunities.
Increased labour market flexibility
Improved education and training, for example, the new deal has provided job training to those who need it.