Causes of Inflation in United Kingdom between July 2018 and August 2018

Running head: ECONOMICS
Economics
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1ECONOMICS
Introduction
Inflation refers to a condition of gradual increase in the price level. It is computed as a
percentage change in consumer price index between two different periods. Depending on
causes of inflation, inflation is divided into two broad categories – demand-pull inflation and
cost-push inflation (Heijdra 2017). Former is caused due to an increase in aggregate demand
in the economy while later is caused by an increase in production cost resulting in a decrease
in aggregate supply. A continuously rising inflation adversely affects welfare of the society
by lowering purchasing power of people. A low to moderate inflation however is good for
producers as it increases profitability by raising price. This is why government adapts an
inflation targeting policy where inflation rate is set within a targeted level (Goodwin et al.
2015). The essay critically evaluates causes of inflation with particular attention has been
given on the causes behind rise inflation between July 2018 and August 2018.
Inflation in United Kingdom
The trend in inflation rate is critical to evaluate movement of price level in the nation.
In July 2018, inflation rate in United Kingdom rose to 2.5. Prior to this, inflation remained at
a steady level of 2.4 percent for the three previous month (bbc.co.uk 2018). This was the first
jump in recorded inflation rate since November 2017 and was consistent in line with the
forecasted rate. Several components of CPI contributed to the increasing inflationary
pressure.
The consumer price index, which include cost of owner occupied houses, increased to
2.4 percent in the month of August compared to 2.3 percent in the month of July. The figure
below shows trend in CPIH along with consumer price index (CPI) and owner occupied
housing cost.

2ECONOMICS
Figure 1: CPIH, OOH and CPI for last ten years (2008 – 2018)
(Source: Ons.gov.uk 2018)
Owner occupied housing accounts nearly 17 percent of CPIH (Ons.gov.uk 2018). This
is therefore, the main driving force for the difference between CPI inflation rate and that of
CPIH.