Inflation is the rate at which prices for goods and services in a country increases. Alternatively, if the value of a currency decreases this can lead to a country experiencing inflation. In the UK, it is primarily measured using the Consumer Price Index (CPI) and the Retail Price Index (RPI), and is represented as an annual percentage change.
Data on inflation is crucial for Central banks, who have a huge influence on economic policy. Central banks use this information to determine how to adjust a country’s interest rates, increasing them to try and control an increase in goods prices.
Inflation can be anticipated and controlled, or it can come as a shock and have much more severe consequences. When demand for a good speeds up faster than supply can match, prices are pushed up, this is demand-pull Inflation. Another cause of inflation is an increase in production costs, cost-push Inflation. Lastly, there is monetary inflation which occurs when there is too much money being distributed into the economy, its value is then depleted and prices must go up.
As one of the UK’s leading investment managers, LGIM offers knowledge and experience that can bring real benefit to investors looking to understand the economic factors and policies which affect inflation.
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