Price Level: Global Influences (AQA A Level Economics)

How Changes in the World Commodity Prices Affect UK Inflation

• 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

How Changes in Other Economies can Affect Inflation 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