Will the British Pound resolve itself and get out of inflation?

Question

Will the British Pound resolve itself and get out of inflation?

Answer 1

There is world-wide inflation now.  And the only way Britain can avoid being affected by this inflation is by raising its intererest rates so much that the value of the British Pound increases substantially relative to other currencies.

Answer 2

At the moment the UK government are stuck between two situations.

Do we aim to keep inflation under controll (2%)?

or..

Do we attempt to prevent ourselfs from the going into further economic turmoil?

The reason I say 'or' is that the theoretical solutions to these situations conflict with eachother.

To controll inflation the Monetary Policy Commitee, in the current situation, need to either increase aggregate supply(AS) or decrease aggregate demand(AD) (aggregate = all, ie. whole economy).

Increasing AS, in the short term, is extremely unlikely in the UK for various reasons - Mainly, we do not have the spare capacity & the rising prices of oil create an upwards pressure on production prices .

The underlying factor of inflation today is to do with oil prices - Cost push inflation - AS is decreasing.

To decrease AD in a sensible way the government would aim to lower disposable income so that consumption decreased.  They could do this in various ways - most likely increasing tax and increasing interest rates.

AD is the only key to solving inflation in the short-term.

HOWEVER

The fact we are now entering a recession is the b*****d. At the moment the housing market is in tatters in terms on confidence levels. High value of house = High wealth = Higer consumption = Higher GDP growth :D yay. BUT this is not the case :( - we have people fearing thier wealth will go down so they save money/ stop spending. This totally f***s up GDP growth - probably will lead to decline.

SO...What do the goverment do about this one?

Easy! - Give us money to spend! this stimulate AD - GDP growth.So How?

Decrease interest rates - Decrease taxation.

Nice :-)

HERES THE CONFUSION FOR THE GOVERNMENT

DO I CONTROLL INFLATION BY DECREASING AD?

OR

DO I SORT OUT GDP BY INCREASING AD?

As for Alistar Darling. He is scared and doesn't know what to do?? So he has just sat in the middle hoping things will sort themselves out lol.

And as 4 the pound. It isn't really causing much effect on inflation. Its more the other way round. Our high prices reduce global competitiveness therefore decrease demand for UK goods and services = decreased demand for pound = decrease value of pound.

It goes into a lot more detail than this and there are alot more factors - but this is just the basic basic econmics behind it. plus i cba 2 babble on boring everyone.