As well as the activities of the MPC, there are other factors which make inflation more or less likely. Basically, inflation is rising prices, so anything that stops prices rising will make inflation less likely.

1. Competition. If there is a lot of competition in a market, businesses try harder to keep prices low to keep buyers.

2. Elasticity of demand. If goods are elastic, buyers will resist price rises. Elasticity is related to substitutability, so if there are plenty of substitutes, then buyers will simply switch spending away from the more expensive products. Imports are a kind of substitute. Competition leads to more choice, so this affects substitutes as well.

3. Elasticity of supply. If businesses can increase output without increasing costs, then price rises are less likely. For example, economies of scale make sellers keen to actually cut costs to expand output and sales.

4. If output rises, businesses buy more inputs, so we need to think of the elasticities of supply and demand in these markets as well, not just finished products. As businesses buy more inputs, these prices may stay much the same, or start to rise which puts up business costs. Wages are especially important because wages can be a very large business cost, and because the labour market isn’t quite the same as the potato market.

5. Labour causes particular problems.

- Wages are ‘sticky’ downwards. If there are too many potatoes on the market, the price falls until buyers decide to buy again. But workers don’t like wage cuts, and it is much easier to put the price of labour up than down, even if it might be a good idea. This gives us a rare benefit of inflation, because it cuts the real cost of wages (albeit slowly) while other prices are rising, so labour ends up being cheaper if this is what is needed eg unemployment is high.

6. Efficiency. If costs rise there are two answers. Only one is to raise prices. The other is to become more efficient so unit costs fall and profits are restored. The more efficient businesses are, the less likely it is they will have to raise prices, and the less likely is inflation.

Inflation is defined as the constant increase in prices for a reason other than that related to market forces of supply and demand. The reason for Inflation is usually the unjust fall in value of money.

1. Inflation distorts prices between different time periods. Normally, people save some money, and there is a balance between savings and spending. Savings go to banks where they become loans for business investment. If there is inflation, you’re better off spending the money now before it loses its value, so consumption now rises at the expense of consumption later; savings are money you plan to spend later.

2. Instead of saving, consumers may start borrowing. £10 000 borrowed now will buy lots of things, and by the time you repay it in a few year’s time, the £10 000 is worth less, and is probably easier to repay if your salary has risen because of inflation. So consumers tend to borrow more and spend even more.

3. Interest rates rise. If a lender normally wants 5% to let someone else use the money for a while, and inflation is also 5%, then the lender will want 10%. This puts up business costs and makes borrowing less and therefore investment less; less investment means less growth and employment.

4. Inflation causes uncertainty which increases risk. Higher risk means businesses are less likely to invest, with the results mentioned in 3.

5. Inflation re-distributes wealth and income. People with fixed incomes eg some pensioners see the real value of their income fall (they become worse off) and other people get pay rises to compensate for inflation (they become better off). Wealth moves from savers to borrowers eg house price inflation makes the owners of houses much better off, and the mortgages become easier and easier to repay.

6. Input prices (raw materials, wages and supplies) rise so business costs rise. Wages are often the largest business cost, and there could be a danger of a ‘wage-price’ spiral where rising costs leads to higher prices, workers ask for a pay rise in compensation, so costs rise again, so prices rise again, and so on.