U.K Inflation

Owing to inflation, there are changes in the purchasing power of the country’s currency. The value of money decreases. In this respect, it is the decrease in the purchasing power of pound. In the event, when the purchasing power of a currency changes frequently, it only indicates, how volatile, the economy of that particular country is.

U.K inflation encompasses, the various effects that inflation inflicts on the economy of United Kingdom. Monetary stability is an important factor, which is maintained, mainly by the Bank of England. Maintaining monetary stability implies, that the rate of inflation is low, the currency of the country is less volatile. By implementing an efficient monetary policy, the inflation induced price changes can be controlled to a large extent.

Bank of England and monetary policies:

U.K inflation is likely to take place, when there is more money in the market as compared to goods as well as services. So, whenever, money is in excess, the government in the United Kingdom, may as well release bonds. Consequently, people will opt for bonds. This is a way of mopping up the extra money from the market. If U.K inflation is low, pound becomes more stable. In the year 1997, Bank of England, was entrusted with the responsibility of framing monetary policies, to maintain the U.K inflation target of 2%. The Bank of England could, at its own discretion, decide upon the rates of interest. The government in England has set a target of maintaining U.K inflation at 2 percent.

U.K inflation showed the following trends in different sectors of the economy:

• Consumer price index (yearly) was as per target set by the government in United Kingdom. It was 1.8% in September. The Consumer price index or CPI was found to remain static since August.
• Changes in the consumer price index was mainly due to the following:
• Owing to reductions in tariff, gas bills as well as electricity bills subsided. During the same period in the previous year (2006), the gas bills as well as electricity bills had escalated.
• The cost of footwear as well as clothing increased but not as much, as it did in the year 2006.
• The consumer price index with regard to non alcoholic beverages as well as food recorded the highest. There was an increase in the price of eggs, milk, cheese and other dairy products. CPI for this category was more than what was seen in 2006, during the same month(September).
• The rate of inflation recorded in the month of September was 3.9%. This was in sharp contrast to 4.1 % recorded in the month of August. This rate of inflation was pertaining to the RPI or the retail price index. There were other additional factors, which affected the retail price index or RPI along with the CPI or the consumer price index.

The consumer price index indicating U.K inflation implies that, the rate of inflation, which was 1.8 percent in the month of August was in close proximity to the 1.9 percent inflation rate of the European Union.