Learning Objectives Define and explain demand pull and

Learning Objectives • Define and explain demand pull and cost push inflation • Distinguish between CPI and RPI measures. • Outline and analyse the impacts and trends of changing inflation rates on businesses. • Evaluate the actions of businesses and the government to high inflation.

Inflation A 2 Business Studies

Groups Inflation and Interest rates Ellie Unemploy- Exchange ment Rates Economic growth Carly Chloe Clemmie Fran Danielle Nicole Laura Sophia Hanne Aimee Annabel Katie

Presentation objectives • Definition of topic & how measured • Recent trends • The effect of recent trends on business strategy • How can businesses respond (your views and a real ife example)

Timetable for presenting • Friday 15 th Jan - Team Growth • Tuesday 19 th Jan - Team Unemployment • Friday 22 nd Jan - Team Ex Rates • Tuesday 26 th Jan - Team Inflation and interest rates

Presentation Guidelines • All team members to take equal responsibility & role • Appropriate handouts to be provided • As long as objectives met lesson can be run how you want (eg role play, games, video, quiz, case study etc) • Classroom based resources can be used • Any additional resources should be provided by team (e. g. prizes)

Curly Wurly • Why did a Curly Wurly Bar used to cost 10 p in 1990 and now it costs 30 p?

Inflation is the sustained rise in the general price level and an associated fall in the value of money.

Inflation Measurement Inflation is measured by the Retail Price Index (RPI) and the Consumer Price Index (CPI). RPI - measures the monthly changes in the prices of a basket of goods and services including changes in housing and council tax. CPI - measures the monthly changes in the prices of a basket of goods and services purchased by UK households. This is the official measure of inflation which the government target to increase by 2% per year. It gives a lower rate than the RPI and can be compared to inflation rates in Europe.

Causes of Inflation

Three Causes of Inflation 1. Demand Pull Inflation This is when demand for a business’s goods and services exceeds its ability to supply these products. This type of inflation normally occurs at the boom stage of the cycle as consumers demand higher wages and therefore have higher incomes and demand more goods and services from businesses, pulling up the price level.

2. Cost Push Inflation This is when the costs of production increase. Causes include increasing wage rates, falling exchange rates (which pushes up the cost of imported raw materials) and increasing oil prices (which are a significant cost element in some sectors).

3. Expectations on inflation • If managers and businesses anticipate rising inflation they might take actions which fuel further inflation. If firms think suppliers will raise prices they will also raise their own prices to ensure that profit levels are maintained. • Trade unions build expectation of inflation into wage demands. • Consumers may make purchases immediately if they believe prices will rise in the future.

Case Study • Nestle has reported a 7% growth in the value of confectionary sales over the past three months. The two main reasons are the huge success of its Kit Kat range and the higher prices for most of its products. These higher prices were necessary to cover the higher raw material costs caused by world inflation and the depreciation of the £ sterling exchange rate. • Questions • Would you classify Nestle’s decision to raise prices as being cost push or demand pull? • Is Nestle’s business recession proof? • How could a business like Nestle respond to high inflation?

Evaluate the following business strategies suggested in response to high inflation for Nestle • Cut internal costs to keep price rises down. • Source from cheaper suppliers. • Cut profit margins by not raising prices as much as costs. • Raise profit margins if inflation is due to demand pull pressure.

How can the government help? • Interest Rates - By raising interest rates people will save rather than spend and this can reduce demand pull inflation. • Trade Union Legislation - Restricting trade union power by controlling striking and picketing, the chance of cost push inflation is reduced. • Reduce expectations of inflation by the government target of 2% each year this encourages business and consumer confidence. • What are the benefits experienced by businesses of low rates of inflation?

Benefits for Businesses of low inflation • Costs are easier to control. • Pricing strategies are easier to establish. • If inflation rates are lower in the UK compared to other countries businesses experience a competitive advantage. • Sales forecasts will be more accurate.

Summary • Can you define inflation? • Explain how a price index is constructed • What is the difference between demand pull and cost push inflation? • What are the two different measures of inflation? • What is the impact of high rates of inflation on a business like Ford? • How might Ford react to high inflation? • What action would the government take to reduce inflation?

What are the problems with high inflation? http: //www. youtube. com/watch? v=t_LWQQrp. Sc 4