Assess the impacts of inflation on the UK economy (8 marks)

Inflation is a sustained increase in the general price level of the UK economy. Due to inflation, it means that the value of money decreases, so each pound can buy less. This means that the real value of debt has also decreased because as prices increase, any money we owe, is consequently worth less. Therefore, this reduces the real value of debt, which helps the poor repay their debt/mortgage to reduce inequality. However, inflation does reduce the value of real wages and real savings to increase inequality since the value of these wages and savings have decreased, so consumers can now purchase fewer goods.Inflation could also increase the costs of raw materials/ commodities. This means that businesses will now have to pay more to buy raw materials and goods for production. This leads to an increase in business costs. Therefore, firms will now increase their market prices to cover for these increasing costs. This could increase inflation further. However, whether firms pass on their increase production costs onto consumers depends on the price elasticity of demand of consumers, so if demand is elastic, firms may not chose to pass on these higher production costs onto consumers through higher prices.