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Inflation figures: Sharp fall in the rate at which prices are rising due to record gas price fall​UK economy 'close to stalling' in July as high interest rates hit firms

Written by Edgenie (Original Source from Sky News)
Last Updated: August 23, 2023 • 5 min read

Summary:

  • UK inflation rates have declined significantly due to a historic decrease in gas prices.
  • Consumer price index (CPI) measure dropped to 6.8% in the year to July, a decline from June's 7.9%.
  • The energy regulator Ofgem's energy price cap change in July contributed to this decrease.
  • Costs reduced for items like electricity and gas, but inflation persisted with price hikes in hotels and air travel.
  • Gas prices saw a record monthly drop of 25.2% between June and July.Service costs surged to a 30-year high of 7.4%.
  • The Bank of England anticipates further inflation reduction, aiming for a 5% rate by year-end.
  • Core inflation, which excludes volatile items, remained at 6.9%.Despite decreases, food price inflation remains high at 14.9% year-on-year.
  • Prime Minister Rishi Sunak pledges to halve inflation and holds himself accountable if the target isn't met.
  • The Bank of England has been increasing interest rates to manage inflation.Inflation challenges began during the pandemic and were exacerbated by the Russia-Ukraine conflict affecting energy prices.
  • Wage growth, surpassing inflation in the private sector, is a current significant driver of price increases.
  • Chancellor Jeremy Hunt emphasizes the goal of reaching the 2% inflation target, while Labour representatives highlight the ongoing cost of living crisis.

A Level Economics Possible Questions:

  1. How did the Consumer Price Index (CPI) measure of inflation change from June to July, and what major adjustment contributed to this change?
  2. Which goods and services saw a price reduction, and which two sectors still contributed to the high rate of inflation?
  3. Using the statistics from the article, explain the historical significance of the changes in gas prices and the cost of services between June and July.
  4. What inflation rate is the Bank of England forecasting by the end of the year, and how does it compare to their inflation target?

Answers:

  1. The CPI measure of inflation decreased from 7.9% in June to 6.8% in July. One significant factor that contributed to this decline was the adjustment made to the energy price cap by Ofgem in July, which reduced energy bills.
  2. The goods and services that experienced a price reduction include electricity, gas, milk, bread, cheese, petrol, and diesel. However, despite these reductions, the sectors of hotels and air travel continued to have price increases, contributing to the maintained high rate of inflation.
  3. Between June and July, gas prices experienced a record drop of 25.2%, marking the most substantial decline since the ONS began collecting this data in 1988. Simultaneously, the cost of services surged to a 30-year record of 7.4%, the highest rate witnessed since March 1992.
  4. The Bank of England is forecasting an inflation rate of 5% by the end of the year. This rate is still more than double their inflation target of 2%.

Possible A Level Economics 25 Marker Question

Evaluate the potential implications and effectiveness of the Bank of England's monetary policy measures, as described in the article, in achieving its inflation target of 2%. In your answer, consider the various factors influencing the rate of inflation and the broader economic context presented.

UK economy 'close to stalling' in July as high interest rates hit firms

Summary:

  • The pound has experienced its longest sequence of daily drops since the onset of the Covid-19 pandemic, due to speculation that a faltering economy will restrict further rises in UK interest rates.
  • The UK economy nearly stagnated in July, causing sterling to depreciate for the seventh consecutive day against the US dollar, the worst run since March 2020.
  • The decline reflects market expectations that the Bank of England will not need to raise borrowing costs beyond 6% from the current 5% to control inflation.
  • Despite expectations of a 0.25 percentage point rate increase in the upcoming monetary policy committee meeting, the pound has continued to fall against the dollar, reaching $1.281.
  • The purchasing managers' index (PMI) supported these views, with output declining from 52.8 in June to 50.7 in July, suggesting that the economy is barely growing; inflation in the private sector has also been at its lowest in over two years.

A Level Economics Possible Questions:

  1. Explain the impact of the weakening UK economy on the value of the pound and its implications for interest rates.
  2. Discuss the relationship between interest rates and currency value, using the case of the UK and the recent depreciation of sterling.
  3. Analyse the Purchasing Managers' Index (PMI) data and explain its role as an economic indicator in the context of the UK's current economic situation.
  4. How might a decline in the value of the pound impact UK's import and export markets? Consider the concepts of elasticity and terms of trade in your answer.
  5. Evaluate the potential impact of the Bank of England's expected interest rate increase on the UK economy, considering both short-term and long-term consequences.

Answers:

  1. The weakening UK economy can lead to a depreciation of the pound as it reduces investor confidence, leading to lower demand for the currency. This can also imply that the economy is not robust enough to handle higher interest rates, which could lead to slower growth or a contraction, so the Bank of England may limit further increases in interest rates.
  2. Interest rates and currency value are interconnected. Higher interest rates typically support a currency's value as they offer investors a higher yield, making the currency more attractive. In the recent case of the UK, despite the Bank of England raising interest rates, the pound has depreciated due to concerns over the health of the UK economy.
  3. The Purchasing Managers' Index (PMI) is a measure of the economic health of the manufacturing sector. It provides information about current and future business conditions to company decision-makers, analysts, and investors. In the UK's current situation, the fall in the PMI indicates a slowing economy, which is barely growing.
  4. A decline in the value of the pound can make UK exports cheaper and more attractive to foreign buyers, potentially leading to an increase in export volume. However, it also makes imports more expensive, which can lead to inflation if the increase in import costs is passed onto consumers. The overall impact on the trade balance would depend on the price elasticity of demand for UK's imports and exports.
  5. The Bank of England's expected interest rate increase can have both short and long-term impacts on the UK economy. In the short term, it could lead to higher borrowing costs, which could slow down consumer spending and investment, potentially slowing economic growth. However, in the long term, higher interest rates could help control inflation and stabilize the economy, which might be beneficial if the economy is overheating.

Possible A Level Economics 25 Marker Question

Evaluate the potential economic impacts of a weakening currency on a country's economy, with specific reference to the recent depreciation of the pound in the UK. Discuss the implications for interest rates, inflation, trade, and overall economic growth. Provide examples and relevant economic theory in your response.

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