| Quarter | CPI Inflation | Core Inflation |
|---|---|---|
| Year 1 Q1 | 1.8% | 1.5% |
| Year 1 Q2 | 2.2% | 1.6% |
| Year 1 Q3 | 3.5% | 1.9% |
| Year 1 Q4 | 4.2% | 2.1% |
| Year 2 Q1 | 5.1% | 2.4% |
| Year 2 Q2 | 5.8% | 2.8% |
The Central Bank expects that domestic inflation will remain elevated above the 2.0% target for the next three quarters. This spike is primarily driven by global supply chain disruptions and a surge in global commodity markets.
The average price of imported raw materials and energy has risen by approximately 25% over the past year, significantly increasing marginal costs for domestic producers. While some large firms have initially absorbed these costs by squeezing profit margins, many small and medium-sized enterprises are now passing these cost increases onto consumers in the form of higher retail prices. To mitigate these pressures, some firms are attempting to negotiate wage freezes or invest in energy-efficient technologies to boost resource productivity.
Long-term price stability requires structural reforms alongside monetary tightening. Raising interest rates can temper demand-pull inflation, but supply-side policies are essential to address the root causes of cost-push shocks. Expanding domestic renewable energy generation and improving infrastructure logistics will make the economy more resilient to import price shocks, shift the long-run aggregate supply curve to the right, and help anchor long-term inflation expectations.
Extract B states that "the average price of imported raw materials and energy has risen by approximately 25% over the past year".
Using an AD/AS diagram to help you, explain the effect that a rise in the price of imported inputs is likely to have on the rate of inflation in the economy.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.