Demand-pull inflation, Microeconomics

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The average price level has increased at a relatively rapid rate since 2008 even though the deep recession that UK experienced in 2008/09. The growth in the price level has been driven by rising global commodity prices and devaluation of sterling following banking crisis in autumn 2008.

Increasing price of global commodities has been partly caused by demand from emerging economies, particularly India and China. These economies have been experiencing strong GDP growth of between 7 and 11% per year that has considerably increased demand for raw materials and sources of energy like gas and oil. This economic growth has produced millions of jobs and lifted more people out of poverty than in any other period in history. Consequently, levels of disposable income have increased and demand for food has surged.

The reduction in the value of sterling on international currency markets followed near collapse of British banking system and the absence of international business confidence in the UK economy. After July 2008 sterling lost about 25% of its value against US dollar though there was some recovery in 2012. Yet some economists argue that Bank of England and HM Treasury encouraged devaluation by a process of 'benign neglect'. They have been relaxed about devaluation that has been exacerbated by Bank's monetary policy setting interest rates at 0.5% and pursuing unorthodox quantitative easing programme in order to make exports price competitive on international markets and imports unattractive to domestic consumers.

Though the price level has generally increased and at a rate of inflation sometimes touching 5% for a very short period in the depth of recession in 2009 price level fell at least when measured by changes in RPI though not the CPI. There was a very short period of deflation (a falling price level).

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Demand-pull inflation

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Cost-push inflation


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