Factors Affecting Inflation: Raw Materials and Food Prices in UK

This article discusses the supply side factors affecting inflation in UK, specifically the rising prices of raw materials and food. It includes figures and data to support the discussion.

Running head: ECONOMICS
Economics
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Table of Contents
Introduction................................................................................................................................2
Supply side factors affecting inflation.......................................................................................2
Raw materials.........................................................................................................................2
Food price...............................................................................................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................6

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Introduction
Consumer Price Index captures the weighted average of prices for a certain basket of
goods and services necessary for the daily life such as food, medical care, transportation,
shelter, fuels and miscellaneous (Goodwin et al. 2015). Rate of change in consumer price
index between two consecutive years is known as inflation.
Supply side factors affecting inflation
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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0.50
1.00
1.50
2.00
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Inflation rate
Inflation rate
Year
Rate of inflation
Figure 1: Trend in UK inflation
(Data.worldbank.org 2018)
As shown from the above figure, the rate of inflation in UK after declining sharply
since 2011 again picked up and gradually increases since 2015. Different supply side factors
explaining trend in UK inflation are discussed below.
Raw materials
The one primary contributor of cost push inflation. As cost of raw materials soars,
producers face a higher cost of necessary materials used in the production process. Given the
cost increases, producers contract the volume of production resulting in a sharp increase in

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price (Uribe and Schmitt-Grohe 2017). In UK, producers in recent years, experience an
increase in material cost. The material cost are rising at faster rate with recorded growth in
price being 4.6 percent in a month. Following week pound, producers face a higher price for
imported fuels. The last recorded data reveals that cost of different raw materials increased by
12.2 percent in the last 12 months (independent.co.uk 2018). Most of the increase in raw
materials price occurred since the vote for Brexit. Rising price of crude oil is the biggest
supply side factor pushing up prices in the last few years.
Figure 2: Raw materials cost in UK
(independent.co.uk 2018)

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Figure 3: Raw material prices in manufacturing industry
(Source: ons.gov.uk 2018)
Food price
The price of food and non-alcoholic beverages in UK increased by 9.3 percent in real
term since 2008. Food price reached to the peak in 2014. Since 2014, there was a gradual
reduction in food price. In 2018, food prices have fluctuated after experiencing a long time of
negative inflation (gov.uk 2018). Successive increase in price of agriculture commodities
have resulted in a higher food price. The food prices have increases above the inflation rate.

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Figure 4: UK trend in food prices
(Source: gov.uk 2018)
Conclusion
At present, inflation in UK is showing an increasing trend. The supply side factor
affecting inflation are rising price of food, raw materials and other necessary inputs.

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References
Data.worldbank.org., 2018. Inflation, consumer prices (annual %) | Data. [online]
Data.worldbank.org. Available at: https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG
[Accessed 13 Jan. 2019].
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
gov.uk 2018. Food Statistics in your pocket 2017: Prices and expenditure. [online] GOV.UK.
Available at: https://www.gov.uk/government/publications/food-statistics-pocketbook-2017/
food-statistics-in-your-pocket-2017-prices-and-expenditure [Accessed 14 Jan. 2019].
independent.co.uk 2018. Inflation set to soar as raw material costs see record increases.
[online] The Independent. Available at:
https://www.independent.co.uk/news/business/news/uk-inflation-falls-pound-value-crash-
consumer-price-index-a7418141.html [Accessed 14 Jan. 2019].
ons.gov.uk 2018. Producer price inflation, UK - Office for National Statistics. [online]
Ons.gov.uk. Available at:
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/producerpriceinflation/
may2016 [Accessed 14 Jan. 2019].
Uribe, M. and Schmitt-Grohe, S., 2017. Open economy macroeconomics. Princeton
University Press.