Powered by Leeds Metropolitan University
Visit the new tutor2u website

Our new website is now in Beta-mode with a brand new collection of study notes and other resources for A Level & IB Economics. Visit the new tutor2u Economics website here.

Factors Influencing Inflation

Author: Geoff Riley  Last updated: Sunday 23 September, 2012


Overview of the factors influencing the rate of inflation

The diagram below summarises some of the key influences on inflation. Reading from left to right:

Average earnings comprise basic pay + income from overtime payments, productivity bonuses and other supplements to earned income.

Productivity measures output per person employed, or output per person hour. A rise in productivity helps to keep unit costs down.

The growth of unit labour costs is a key determinant of inflation in the medium term.

Additional pressure on prices comes from higher import prices, commodity prices (e.g. oil, copper and aluminium) and also the impact of indirect taxes such as VAT and excise duties.

Prices also increase when businesses decide to increase their profit margins. They are more likely to do this during the upswing phase of the economic cycle. Conversely inflationary pressures decline in a recession when businesses have far more spare capacity and may decide to offer deep price discounts to their customers to get rid of unsold stock.

The wage price spiral – “expectations-induced inflation”

Rising expectations of inflation can be self-fulfilling

 If people expect prices to continue rising, they are unlikely to accept pay rises less than their expected inflation rate because they want to protect the purchasing power of their incomes

When workers are looking to negotiate higher wages, there is a danger of a ‘wage-price spiral’ that then requires the introduction of deflationary policies such as higher interest rates or an increase in direct taxation.

Add your comments and share this study note:

blog comments powered by Disqus


Search tutor2u

Order by 

Related study notes

Buy your personal copy of our Economics revision guides

tutor2u Economics Revision Guides

Behavioural Economics
Network Economics
Game Theory
Business Economics
Economics of Utilities
Contestable Markets
Competitive Markets
Economies of Scale
Management Issues
Monopolistic Competition
Price Discrimination
Competition Policy
Commodities Markets
Emerging Economies
Human Development
African Economy
South African Economy
Kenyan Economy
Development Economics
Brazil Economy
China Economy
Indian economy
Russia Economy
Cost Benefit Analysis
Cycles and Shocks
Aggregate Demand
Capital Investment
Consumer Spending
Aggregate Supply
Economic History
Economic Growth
Economics of Technology
Environmental Economics
European Economy
EU Enlargement
EU Farming and Fishing
Single Market
The Euro
Exchange Rates
Money and Finance
Global Economy
Balance of Payments
Credit Crunch
International Trade
Housing Economics
Government Intervention
Buffer Stocks
Government Failure
Indirect Taxes
Maximum Prices
Minimum Prices
Health Economics
Inflation and Deflation
Labour Market
Trade Unions
Introductory Economics
Macroeconomic Policies
Fiscal Policy
Monetary Policy
Supply-side policies
Trade Policies
Keynesian Economics
Market Failure
Factor Immobility
Information Failure
Merit & De-Merit Goods
Public Goods
Manufacturing Industry
Oil and Gas
OECD Economies
Australia Economy
French Economy
German Economy
Greece Economy
Ireland Economy
Japan Economy
Spain Economy
US Economy
Poverty and Inequality
Market Equilibrium and Price
Elasticity of Demand
Elasticity of Supply
Nature of Demand
Nature of Supply
Price Mechanism in Action
Price Volatility
Inter-related Markets
Standard of Living
Transport Economics
UK Economy
Regional Economics
London Economy
Recession Watch



Tutor2u support for students
Teaching support and resources
Search for resources on tutor2u

Refine Search by Subject
A Level Economics
Business Studies
Geography Give It A Go!
History Law
IB Diploma Politics
Religious Studies Sociology

Order Search Results By

Follow tutor2u on Twitter

tutor2u Home Page | Online Store | About tutor2u | Copyright Info | Your Privacy | Terms of Use


Boston House | 214 High Street | Boston Spa | West Yorkshire | LS23 6AD | Tel +44 0844 800 0085 | Fax +44 01937 529236

Company Registration Number: 04489574 | VAT Reg No 816865400