Inflation – Counter Government Policies
The Government could try and counter this type of cost push inflation by introducing and changing different monetary and fiscal policies.
The Government could look at influencing the Bank of England to increasing interest rates which would bring about a restrictive monetary affect. This would firstly cut consumer spending – consumers would look to spend less because they have less as their disposable income would decrease as they would have to pay back more on their borrowings. Consumers again would look to take money out of the economy and place it into banks as they would now get a better rate of return on their savings.
Businesses would find that because consumers are spending less demand decreases and so to try and shift some of their stock they are likely to do offer promotional via different pricing strategies would lead to prices falling and inflation. Businesses would also find that their borrowings have also increased and so have to pay back more each month and so are also likely to cut spending.
The clever thing about interest rates is that they can have an effect on the exchange rate of the pound. What you’d find is that the UK economy would see a flow of ‘hot money’ into the economy. This would be because of the high interest rates, foreign investors will want to benefit from a better rate of return on their money and so exchange (buy) pounds and so as they demand more pounds, via basic demand + supply the cost of pound increases. This means now that the pound is strong, especially against other currencies. This means that imports become cheaper as pounds are worth more businesses get more for their money, this means that for firms importing raw materials their business costs of production decrease. This again counter acts inflation.
To counter defence any wage price spirals (wage inflation) the UK government could look at introducing policies which forbids businesses to increase people’s wages. Although when the Government has tried this in the past it was a success.
