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Is Inflation Losing Its Meaning as an Economic Indicator?

2095 words (8 pages) Business Assignment

30th Nov 2020 Business Assignment Reference this

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Inflation:

Inflation is a continuous rise in the price of goods and services in the economy over a period. There are two types of inflation which are low inflation and high inflation. Low inflation is seen to be a good thing for the economy as it encourages people to buy goods and services and to borrow money if needed. (Media, 2020). High inflation is seen as a disadvantage to the economy as it causes the currency levels to weaken causing the economic growth to weaken. (Media, 2020).  Inflation is recorded by the Consumer Price Index which records the price levels of goods and services in the economy over a period. Consumer Price Index try to keep the inflation levels as low as possible at around 2%. In Ireland there has been a constant change in the rate of inflation since the 1984s. (Business Education.ie, 2020) Since 2008 there has been a great recession in Ireland which has caused a huge change in the global economy.

Inflation can be controlled by the monetary policy. The monetary policy is the use of the money supply and interest rates to achieve the maximum levels of income. This is all co-ordinated by the government central bank. The monetary policy is put in place to keep the inflation levels low. The purpose of the monetary policy is to keep the interest levels less than or equal to 2%. (Centralbank.ie, 2019) The monetary policy recommends that when the economy expands the inflation levels will begin to rise. When this happens, it causes the economy to go back into a recession.

Figure 1:Shows the inflation levels in Ireland since 1984 (Statista,2019)

Currently the inflation levels in Ireland are 1.1% since November which has been higher that previous months.

Inflation in Ireland has been happening since 1984 up until current years due to three leading factors which are due to economists called cost push inflation, demand inflation, hyperinflation. Inflation in Ireland was at its worst between the years 2006-2010.

Factors affecting inflation:

Cost push Inflation:

Cost push inflation is when the cost of the business rises and is passed onto the customers. These rises can be affected by the price of oil, raw materials as other countries are developing. Some workers in Ireland are looking for an increase in their wages and are succeeding in doing so due to the political situation that they are in. The cost of land rent is always on the increase due to the failure in building planning. All these factors cause an effect on the customers as the price of goods and services are increasing to make up for the loss in the economy. (Economicsonline.co.uk, 2019)

Demand Inflation:

Demand inflation is the amount of people that want a product, but the product supply is not there. Demand inflation is seen as a good thing in the economy as it shows that people are getting richer and have more money to spend. Demand inflation is the main cause of inflation. (The Balance, 2019) When the demand increases and the supply decreases which results in a rise in the price of goods as people will pay more money for products. When the demand increases it results in a decrease in the supply. During inflation the tax rates can be lowered but results in a rise in the disposable income and price rises. A fall in interest rates may allow consumers to take out mortgages to buy goods and services but the demand increase can cause a rise in the price of goods. (Pettinger, 2019)

Hyperinflation:

Hyperinflation is when the government start printing money to pay for goods and services which will result in a rise in the availability of money causing the inflation levels to rise. Hyperinflation is caused by the government central banks printing money in order to help create more jobs in the economy. After a while the value of money starts to fall as there is too much money being used for the same products causing the price of goods to rise. During this period companies start developing more products as they have the money. (The Balance, 2019)

Consequences of inflation:

Impacts the cost of living:

Inflation can affect the cost of living by affecting people’s income and expenses. Peoples income and expenses tends to change each day depending on what the products demand is and what supply is available. The correlation between supply and demand causes inflation as price increases it causes the demand decreases. Inflation can cause your income to reduce while increasing the expenses. (Economics Discussion, 2020)

Borrowing and Mortgages:

Inflation can affect the cost of borrowing as high inflation can increase the cost of borrowing for businesses and people needing to get loans and mortgages. Where there are low inflation and interest rates the cost of borrowing of money for mortgages will be reduced. (tutor2u, 2020) this puts a lot of pressure on the government to increase the pensions, unemployment benefits and social welfare payments as the cost of living is increasing.

How inflation has affected Ireland:

Recession:

Inflation in Ireland really has been affected due by the recession that hit Ireland in 2007.In 2008 the rate of inflation was at 5.2% and every year it began to rise until 2014 and half of 2015 when the inflation levels were 7%. (The Economist, 2019) From 2015-2019 the inflation levels began to drop resulting in the current inflation level being 1.1% since November. Which is the current position that it is at. The current inflation levels in Ireland are 1.1% which shows the levels are beginning since November. (Tradingeconomics.com, 2019) In 2007 there was a huge crisis in Ireland resulting in the housing market to collapse. The GDP for 2007 was way below the usual amount. As a result, the recession and the banking bail out suffered. (The Economist, 2019) Due to the recession in 2007 the unemployment levels in Ireland were 5% and in 2008 they were 7.3% which shows the unemployment levels were rising as a result of the recession due to businesses. (The Balance, 2020)

Figure 2:Shows the unemployment levels in Ireland (The Economist,2019)

Brexit:

Brexit is where the British want to leave the European Union. The idea of Brexit is to stop Ireland exporting goods to other countries through the UK and to the UK.

Figure 3:Show the number of votes that wanted to leave and remain in the EU. (The Irish Times, 2019)

In 2016 a vote took place in the Britain to see if they should leave the European Union. The results above show the result that were collaborated from the vote showing that 48.1% of the people that voted wanted to remain part of the European Union and 51.9% of the people wanted to leave. (The Irish Times, 2019)

On the 29th of March 2019 it was believed that Britain will officially leave the EU. As a result of Britain leaving the Eu it has caused the housing market to come to a standstill due to the sterling starting to decrease in value. If Therese May put a deal in place it would prevent the currency having to change until December 2020.This would allow the government to discuss new trade deals as they would have more time before the change.

On October 25th, 2019 Bertie Ahearn and John Bruton met with Britain’s house of lord to talk about the effects of Britain’s decision to leave the European Union. As a result of Britain wanting to leave the UK it means that Irelands economy will be left to suffer as most of Irelands exports go through the Britain. Currently, exports to Britain has been affected as the sterling currency which has weakened causing an increase in the price of exports out of Ireland. Since Britain decided to leave the EU beef, dairy and mushroom farmers have closed due to lack of demand for their products as Britain was one of their main countries for exporting as they export four fifths of their products to Britain. Due to the lack of demand for their product it has resulted in the company having no money. (Economicsonline.co.uk, 2020)

Inflation is losing its meaning as an economic indicator:

Inflation is losing its meaning as an economic indicator means that inflation does not show how well the economy is doing. Inflation in Ireland has been so low since 2008 so it does not show how well the economy is doing. If the inflation levels were high it would cause the economy to go into another recession like 2008.  Inflation shows an increase in the price of goods and services over a period of times. Inflation as an economic indicator has shown a huge effect on people in Ireland economically. It has affected the people of Ireland by increasing the price of goods which effects the demand and supply of the goods. As the demand increases it causes a decrease in the supply. The inflation levels can also be affected by hyperinflation which causes a large availability of money by the government central bank which causes the inflation levels to rise.

References:

  1. Business Education.ie. (2020). Inflation. [online] Available at: https://businesseducation.ie/economic-indicators/inflation/ [Accessed 1 Jan. 2020].
  2. Centralbank.ie. (2019). Monetary Policy | Central Bank of Ireland. [online] Available at: https://www.centralbank.ie/monetary-policy [Accessed 31 Dec. 2019].
  3. Economicsonline.co.uk. (2019). Inflation | Economics Online. [online] Available at: https://www.economicsonline.co.uk/Global_economics/Inflation.html [Accessed 27 Dec. 2019].
  4. Media, T. (2020). Inflation, detailed information about inflation. [online] Global-rates.com. Available at: https://www.global-rates.com/economic-indicators/inflation/inflation-information.aspx [Accessed 1 Jan. 2020].
  5. Pettinger, T. (2019). Different types of inflation - Economics Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/2656/inflation/different-types-of-inflation/ [Accessed 25 Dec. 2019].
  6. Statista. (2019). Ireland - Inflation rate 2024 | Statista. [online] Available at: https://www.statista.com/statistics/375229/inflation-rate-in-ireland/ [Accessed 27 Dec. 2019].
  7. The Balance. (2019). 5 Causes of Demand-Pull Inflation. [online] Available at: https://www.thebalance.com/what-is-demand-pull-inflation-3306100 [Accessed 29 Dec. 2019].
  8. The Balance. (2019). Could You Survive Hyperinflation? [online] Available at: https://www.thebalance.com/what-is-hyperinflation-definition-causes-and-examples-3306097 [Accessed 25 Dec. 2019].
  9. The Economist. (2019). Celtic phoenix. [online] Available at: https://www.economist.com/finance-and-economics/2015/11/19/celtic-phoenix?zid=295&ah=0bca374e65f2354d553956ea65f756e0 [Accessed 25 Dec. 2019].
  10. The Economist. (2019). Ireland may suffer the most from Brexit. [online] Available at: https://www.economist.com/europe/2016/10/29/ireland-may-suffer-the-most-from-brexit?zid=295&ah=0bca374e65f2354d553956ea65f756e0 [Accessed 27 Dec. 2019].
  11. Tradingeconomics.com. (2019). Ireland Inflation Rate | 2019 | Data | Chart | Calendar | Forecast | News. [online] Available at: https://tradingeconomics.com/ireland/inflation-cpi [Accessed 24 Dec. 2019].
  12. The Balance. (2020). Compare Today's Unemployment with the Past. [online] Available at: https://www.thebalance.com/unemployment-rate-by-year-3305506 [Accessed 4 Jan. 2020].
  13. Economicsonline.co.uk. (2020). Brexit update | Economics Online. [online] Available at: https://www.economicsonline.co.uk/Global_economics/Brexit_update.html [Accessed 4 Jan. 2020].
  14. tutor2u. (2020). Inflation - Consequences of Inflation | Economics | tutor2u. [online] Available at: https://www.tutor2u.net/economics/reference/inflation-consequences-of-inflation [Accessed 4 Jan. 2020].

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