Analysis of UK Economy: Inflation, Interest Rates and Slow Growth

Running Head: ECONOMICS
Economics
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1ECONOMICS
Table of Contents
Introduction......................................................................................................................................2
Inflation............................................................................................................................................2
Depreciation of sterling and UK CPI inflation................................................................................3
Effect of an increase in interest rate on UK economy.....................................................................4
Reasons for slow growth in the first quarter of 2018......................................................................6
Impact of tight monetary policy on UK economy...........................................................................7
Conclusion and Recommendation...................................................................................................8
References......................................................................................................................................10

2ECONOMICS
Introduction
The report prepares a brief analysis of a case study based on present and future projected
state of the economy in United Kingdom. Economic growth in UK is dependent on the designed
bank rate by Monetary Policy Committee. Growth has been observed to be shifted away from
consumption tending toward net trade balance and business investment. The economy is
projected to experience a situation of excess demand following a slow growth in domestic
supply. With a faded effect of depreciating sterling domestic inflation is expected to decline
gradually. State of the UK economy has been discussed in reference to macroeconomic concepts
of inflation, effect of sterling depreciation on inflation and impact of MPC’s decision regarding
interest rate on UK economy. Additionally, the analysis also sheds light on factors behind slow
growth of UK economy in the first quarter of 2018 and finally the impact of tight monetary
policy on the economy.
Inflation
In economics, the term inflation indicates a situation of sustained increase in the level of
price over a period. With an increase in the price level, fewer goods and services can be
purchased with every unit of the currency. Inflation thus indicates a decrease in purchasing
power of money. This in turn is a loss in the real value of medium of exchange within an
economy. Inflation is measured in terms of a percentage change in the price index (Case, Fair
and Oster 2014). Consumer price index is generally accepted as a standardized measure of
inflation. Inflation is broadly categorized as either demand-pull inflation or cost-push inflation.
The former is caused by an increases in aggregate demand while the latter is caused by a rise in
the cost of production.

3ECONOMICS
Depreciation of sterling and UK CPI inflation
In the last few years, especially after the Brexit referendum, UK has experienced a
dynamic increase in inflation. The recorded inflation in November 2017 was 3.1 percent.
Inflation increased to 2.7 percent in April, which is the highest recorded inflation since the fourth
quarter of 2013. The Consumer Price Index grew at an annual rate of 2.3 percent since March of
this year (theguardian.com 2018)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
UK inflation
Year
inflation rate
Figure 1: Trend in inflation rate in UK
(Source: ons.gov.uk 2018)
As shown in the above figure, average inflation in UK speeded up from 2015 onwards.
The inflation rate however has not caused from typical domestic factors like demand and cost
side factors. Depreciation of sterling is one major factor contributing to rising inflationary
pressure in UK. Depreciation of a currency refers to a situation where value of domestic currency