Inflation is a sustained increase in the general price level leading to a fall in the purchasing power of money. It is caused by two major groups of factors: The demand-pull factors, when the total demand for goods and services exceeds the total supply and the cost-push factors, when firms increase prices in order to maintain or protect profit margins.

Inflation in the British economy has over the last decade been more subdued than in the 1970s. This long period of low inflation has been brought about by various factors related to cost-push and demand-pull theory. At the start of the 1990s inflation was high (10.9% as measured by the RPIX) which had been brought on by an increase in aggregate demand and by firms trying to make more profit by passing costs on

The exchange rate was anchored to the low inflation German economy which caused a further dip in inflation because it encouraged British companies to keep their costs under control. The measure of unit labour cost inflation fell from 10 -0.3 % in three years. Producers started to absorb costs instead of passing them on to the consumer. As a result of this, by the end of 1993, inflation fell to below 2%.

Inflation is very hard to control totally as the causes of it are not easily manipulated. But at the moment the government seem to have all the factors in the right quantity as the rate is not only low but also quite steady. I believe that if there are no major shocks to the economy then inflation is set to stay low.

One of the major reasons that inflation has been so low over the last few years was due to the introduction of an inflation target. This was a figure set

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