Research Report: The Impact of Inflation Rate on UK GDP (1990-2018)

This report examines the impact of the inflation rate on the gross domestic product (GDP) in the United Kingdom from 1990 to 2018. The study investigates the relationship between inflation and GDP using a quantitative approach, employing a positivism philosophical stance and a deductive approach to test existing theories. Secondary data from sources such as Kaggle and peer-reviewed journals are used for a longitudinal analysis. The research employs Pearson's correlation method to analyze the association between inflation and GDP. The findings reveal a negative correlation, although not statistically significant, challenging the standard macroeconomic model. The report discusses the implications of these findings, considering factors such as deflation and economic slowdown in the UK, and concludes that the relationship between inflation and GDP varies across different economies. The team research process involved overcoming challenges in formulating the research question, selecting data sets, and choosing the appropriate methodology, which contributed to the final results.

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Topic: The impact of inflation rate on the gross domestic product in the United Kingdom
Part A
Research question
What is the impact of inflation rate on the gross domestic in the United Kingdom in past two
decades?
Part B
Introduction
This report aims to examine the impact of inflation rate on the gross domestic product of
any company. Inflation is a common aspect in majority of the global economies and variety of
countries face challenges in developing economic growth. The price system efficiency is
significantly affected due to the lack of balances in the real money. The inability to
systematically understand these issues results in inflation in most of the countries. Inflation
control is one of the major factors in developing monetary policies in traditional environment.
Aggregate control of demand is another factor is essential for monitoring the economy (Lim and
Sek 2015). Past researches have stated that macroeconomic reforms such as privatisation and
liberalisation must be implemented to improve the economic condition and develop an open
economy. The analysis of the past studies has shown that inflation has been paid attention in both
empirical and theoretical studies. Moreover, inflation is expected to have significant impact on
unemployment rate in an economy.
Background and research problem
The majority of the countries in the global market have faced issues in developing a
stronger economy in the market where inflation comes into play. In developing countries, with
the growth of the economy, there is a significant increase in inflation rate. Gross domestic
product of a country increases which shows an increase in inflation rate (Lim and Sek 2015).
The analysis shows that with increase in demand in the market, there is a significant increase in
production, employment opportunities which further increases demand in the market. This
increases the disposable income of the consumers and it increases GDP and inflation at the same
time. When there is no demand, production volume decreases and it leads to increase in inflation
and GDP due to the decreases in consumer demand and supply (Khan et al. 2018). On the other

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hand, when the demand is high and the supply is short, it increases the employment rate of any
organisation which increases the GDP and inflation. However, in developed countries like
United Kingdom, they face the problem of deflation. These countries set a target of 2 percent
inflation rate (Majumder 2016). It is used for adjusting the monetary growth and instruments
such as reserve ratios and interest rates. In the past few years, it has been seen that there has been
a significant negative change in inflation rates in developed countries which indicates slow
growth of the economy which stagnates the per capita income and declines wages. Therefore, the
study aims to examines the relationship between inflation rate and GDP in the United Kingdom
as it is a developed nation and going through economic slowdown in the past few years.
Research question
What is the impact of inflation rate on the gross domestic in the United Kingdom in past two
decades?
Literature review
The analysis of the past literature sources has shown that a long history of studies
identifying the existing relationship between GDP growth and inflation rate. The view of various
economists changed over time but initially the negative impact of inflation rate on GDP was not
considered. Series of studies in the 60s showed that there was no negative impact of GDP on
inflation. Majumder (2016) performed a study to identify that there were no significant negative
or positive impact of inflation rate on GDP of a country. On the contrary, Khan et al. (2018)
performed a study which showed that there was significant negative impact of inflation rate on
the GDP. Numerous studies in the 70s have showed repeatedly that inflation rate has negative
impact on GDP. Other studies have examined the impact of the inflation rate on countries having
high inflation in other countries. Ramlan and Suhaimi (2017) performed a study which examined
the impact of inflation rate and gross domestic product growth by using cross sectional time
series regression analysis. Lim and Sek (2015) analysed data from more than 100 countries from
1960 to 1990 which showed that there has slow down in the economy due to the increase in the
inflation rate. Muhibbullah and Das (2019) showed that cross-sectional correlation between gross
domestic product and inflation rate exists in case of high frequency data. On the other hand,
Hong, Razak and Hamzah (2015) states that negative impact of inflation rate is realised after it
crosses the threshold frequency. Moreover, there are studies which aimed to examine the non
linear relationship between these two variables.

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Research Methodology
Research methodology defines the overall design and process of gathering information
and evaluating it to examine the impact on inflation rate on the gross domestic product of the
United Kingdom. In this research, the study has used a positivism philosophical stance to
develop a scientific and naturalist view. It facilitates in performing quantification of the data
gathered. On the other hand, deductive approach has been used for testing existing theories
mentioned in past studies (Flick 2015). The study has chosen a causal research design as it helps
in establishing the cause and effect relationship between inflation rate and gross domestic
product. Secondary data collection has been used to collect data set from Kaggle and other data
has been collected from peer reviewed journals and articles. This a longitudinal study where the
data over the past decades has been collected. GDP and inflation data of the United Kingdom
from 1990 to 2018 has been collected and examined using quantitative analysis. SPSS (statistical
package for social sciences) has been used as a tool for performing inferential statistics.
Pearson’s correlation method has been used as a method for understand the degree and nature of
association between the variables at two tailed.
Findings and Results
Correlations
inflation rate GDP at market
prices
inflation rate Pearson Correlation 1 -.271
Sig. (2-tailed) .155
N 29 29
GDP at market prices Pearson Correlation -.271 1
Sig. (2-tailed) .155
N 29 29

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Implication and Interpretation
The data collected has not been able to develop a linear relationship between the data
collected. However, correlation is negative in nature but the value is not significant at two tailed.
Initially, the non linear relationship between inflation rate and gross domestic product does not
fit well within the standard macroeconomics model. It has been seen that predictable increase in
inflation rate may also have significant impact on financial system and gross domestic products
in the organisation. Moreover, it shows that developed countries like the United Kingdom faces
issues like deflation which is the reason that the country has been experiencing low growth in the
market. The disposable income of people in the country has stagnated and reduced due to the
slow economic growth but with increase in inflation rate, the supply is expected to increase
which increases employment rate and gross domestic product. This shows that the impact of
inflation may be different in various economies which means that the implications are different
in developing and developed countries. This indicates the non-linear relationship between the
variables. These countries set a target of 2 percent inflation rate. It is used for adjusting the
monetary growth and instruments such as reserve ratios and interest rates.

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Conclusion
Thus, it can be concluded from the analysis that relationship between the inflation rate
and gross domestic product varies in different economies. Correlation is negative in nature but
the value is not significant at two tailed. Initially, the non-linear relationship between inflation
rate and gross domestic product does not fit well within the standard macroeconomics model. It
has been seen that predictable increase in inflation rate may also have significant impact on
financial system and gross domestic products in the organisation. It means that linear equation
cannot successfully measure the relationship between the two variables but in case of developed
countries, the complex nature of the economy makes it difficult to predict the relationship. This
means that there is a negative relationship between inflation and GDP till a certain threshold but
it become positive due to deflation and stagnated economy.
Part C
Peer evaluation
We have completed this report through constant ups and downs and gained significant
understanding of various aspect of performing the research. It cannot be said that any one of us
have hindered the progress of the report as we have all given our 100 percent to complete the
study effectively. However, we have gone through series of arguments in formulating the
research question and choosing the ideal data set for the study. Moreover, we had a tough time in
choosing the ideal method for data collection. In the end, through continuous discussion and
support from all the group members we have fulfilled our objective and the skilled learned will
be definitely helpful in our future careers. Therefore, we cannot say that no one has contributed
to the research and everyone has contributed to the final results obtained.

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References
Flick, U., 2015. Introducing research methodology: A beginner's guide to doing a research
project. Sage.
Hong, S.C., Razak, A. and Hamzah, S., 2015. The impact of nominal GDP and inflation on the
financial performance of Islamic banks in Malaysia. Journal of Islamic Economics, Banking and
Finance, 113(3281), pp.1-24.
Kaggle.com 2019. A millennium of macroeconomic data. [online] Kaggle.com. Available at:
https://www.kaggle.com/bank-of-england/a-millennium-of-macroeconomic-data [Accessed 17
Dec. 2019].
Khan, I., Ahmad, A., Khan, M.T. and Ilyas, M., 2018. The Impact of GDP, Inflation, Exchange
Rate, Unemployment and Tax Rate on the Non Performing Loans of Banks: Evidence From
Pakistani Commercial Banks. Journal of Social Sciences & Humanities (1994-7046), 26(1).
Lim, Y.C. and Sek, S.K., 2015. An examination on the determinants of inflation. Journal of
Economics, Business and Management, 3(7), pp.678-682.
Majumder, S.C., 2016. Inflation and its impacts on economic growth of Bangladesh. American
Journal of Marketing Research, 2(1), pp.17-26.
Muhibbullah, M. and Das, M.R., 2019. The Impact of Inflation on the Income Inequality of
Bangladesh: A Time Series Analysis.
Ramlan, H. and Suhaimi, M.I., 2017. The Relationship between Interest Rates and Inflation
Toward the Economic Growth in Malaysia. Journal of Humanities, Language, Culture And
Business (Hlcb), 1(1), pp.55-63.

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Appendix