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inflation - Coggle Diagram

- - - - It increases the price of imports and decreases the international price of exports from a region. AD would increase if buyers buy less imports as exports rise, and there could be a multiplier effect on demand and production levels.
    - - For example, lower direct or indirect taxes or higher spending by the government. Consumers have more disposable income as direct taxes are decreased, allowing demand to grow. Increased government spending and higher borrowing generate additional demand in the circular flow
    - - Too much demand, such as growing demand for loans or leading to house price inflation, can be stimulated by a drop in interest rates. Financial economists claim that inflation is triggered by "too much money chasing too few products" and that if the financial system allows the money supply to grow too rapidly, governments will lose control of inflation.
    - - Giving a boost to UK exports abroad. Export revenues can provide external source of revenue and investment into the circular flow of the UK, because what happens to other countries' economic cycles clearly affects the UK.
- - - - An rise in the cost of raw materials and other foods, for example. This may be due to an increase in commodity prices used in food production, such as oil, copper and farm products. A recent example was an increase in the price of wheat worldwide.
    - - Driven by wage rises, which are greater than efficiency gains. When unemployment is low, labour rates also increase because skilled workers are scarce and this can force pay levels higher. When people expect higher inflation, salaries will rise, so they ask for more pay to safeguard their real incomes. Trade unions will use their bargaining power to bid and accomplish more and more wages, this could be a cause of cost-push inflation
    - - When people see prices increase for everyday things, they become worried about the impact of inflation on their real standard of living, which is critical in shaping what really happens to inflation. The Bank of England calls "second-round effects" one of the risks of a pick-up in inflation.
    - - For example, an increase in alcohol, fuel and cigarette duty, or an increase in Value Added Tax. Suppliers which choose to pass on the burden of the tax to customers, depending on the price elasticity of demand and supply for their goods.
    - - This can lead to cost inflation because it contributes to higher costs for manufactured goods, such as basic raw materials, components and finished products.
    - - In a market where dominant industries use their market power (at whatever level of demand) to lift prices well above costs
- - - - using the consumer price index (CPI)
- - - - Some inflationary pressures originate from the domestic economy, such as decisions taken by energy firms to supply electricity or gas or water on their tariffs for the coming year, or food retailers' pricing strategies based on the strength of demand and the competitive pressure of their markets.
    - - A rise in the rate of VAT would also be a cause of increased domestic inflation in the short term because it increases a firm's production costs.
    - - Inflation may also be affected by exchange rate fluctuations, such as a drop in the value of the pound against other currencies may lead to higher import prices for goods such as Western European foods or U.S. technology supplies that feed directly or indirectly into the consumer price index
    - - Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.