Inflation – rising costs + wages
Using information from the two articles, explain how rising costs and wages may impact upon inflation.
Whilst comparing the two articles you can see that both have ‘rising’ costs for raw material in common. In the first article you can see how rising costs for flour are pushing up the prices of bread loafs.
According to the article it says that due to a recent heat wave in the south east it has caused damage to the crops and has resulted in a bad harvest. This will have an impact on supply of flour as you find that when the supply of a good decreases then the resource becomes scarcer and pushes up prices for that good. This rise in costs will have a negative on businesses; you find that because of their costs of production increases this will firstly increase ‘Factory Gate’ Inflation as the costs of each unit being made has increased. Secondly businesses such as the bread making companies’ form the articles may decide to pass on the extra costs of production onto consumers in the form of higher prices this will then cause inflation in the economy.
Wage inflation caused by a wage price spiral could also occur when it comes to businesses passing on additional costs onto the consumer. You usually find that as the price of goods increase in the market then workers (who are consumers) will tend to demand higher wages (pay increases) in line with the increasing inflation rate to compensate for higher costs in the market. In many cases businesses may grant these pay increases but again their business costs increase and further more businesses will look at ways it can cover these costs. Some businesses may lay off workers whilst the majority will raise the price of their goods to help cover the increase in costs of the production, but the thing is that workers may very well again demand yet another pay increase due to the prices being put up once again and so this is a vicious circle where wages and prices of goods are just chasing each other up, this is called a wage price spiral and could lead to very high inflation in both wages and the price of goods.
Click below to download the full article (including diagrams)
by Rhys Gregory
http://www.rhys.eu/blog/wp-content/uploads/2009/06/inflation.pdf
