Price Level: Global Influences (AQA A Level Economics)

• Imported inflation in the UK occurs when the prices of goods and services imported from other countries increase, contributing to an overall rise in the domestic price level
• Commodity prices play a crucial role in imported inflation, as they impact the cost of raw materials and goods purchased from abroad
• Two common sources of imported inflation in the UK occur in food and oil supplies

Oil prices

• The UK heavily relies on imported oil for energy
• When global oil prices rise, it increases costs for the UK affecting various sectors such as transportation, manufacturing, and energy production
  • This, in turn, contributes to import inflation
    

Food prices

• The UK imports a significant portion of its food and changes in global commodity prices, such as those for wheat, soybeans, or livestock, directly influence the cost of imported food products
• Eg. Global wheat prices increased in 2023 due to Ukraine-Russia geopolitical conflict
  • This resulted in higher costs for imported wheat-based products in the UK

• The world is more connected than ever and there is a high level of interdependence between economies
  • Covid 19 and the Ukraine War demonstrated how disruptions in one part of the world cause widespread problems in others
• One country's imports are another country's exports
• Theoretically, the global value of exports will be equal to the global value of imports
• Producers all over the world are often highly dependent on imported raw materials used in production; e.g. a motor car has around 30,000 individual parts
  • Building a car is a global effort and requires a high level of interconnectedness between multiple economies
• Changes in other economies can be good or bad for the domestic economy

How Changes in Other Economies can Affect inflation in the UK

Factor	Explanation	Impact on Inflation
Exchange rates	Changes in exchange rates between the UK and other economies can affect the cost of imports and exports	A depreciation of the UK pound could lead to higher import prices, increasing the price of imported goods for UK consumers and raising inflation Conversely, a strengthening pound could lower import prices, dampening inflationary pressures
Economic growth in trading partners	Economic growth in other economies can affect demand for UK exports	Strong economic growth in major trading partners may increase demand for UK exports, contributing to inflation in the UK Conversely, weak economic growth in trading partners may reduce demand for UK exports, leading to lower prices and reducing inflation
Global shocks	Events like wars, political instability, or natural disasters in other economies can lead to global shocks	Global shocks tend to increase inflationary pressures Periods of global stability and peace tend to dampen inflationary pressures