| Quarter | CPI Inflation | Core Inflation |
|---|---|---|
| Year 1 Q1 | 1.2% | 1.1% |
| Year 1 Q2 | 1.5% | 1.2% |
| Year 1 Q3 | 2.9% | 1.5% |
| Year 1 Q4 | 3.8% | 1.8% |
| Year 2 Q1 | 4.9% | 2.2% |
| Year 2 Q2 | 6.2% | 2.7% |
The Central Bank anticipates that domestic inflation will remain significantly above the 2.0% target for the remainder of the fiscal year. This acceleration is driven by a 40% increase in international maritime freight tariffs and container shipping costs over the last twelve months.
Because the domestic economy relies heavily on sea transport for importing manufacturing components and consumer goods, these rising transport tariffs have drastically inflated the landed cost of intermediate goods. While multinational corporations have initially absorbed these overheads by compressing profit margins, mid-sized domestic manufacturers are increasingly transferring these logistics cost hikes directly to final consumers. To combat these rising input costs, some firms are reorganising their supply chains to source from local suppliers or investing in automation to lower unit labor costs.
While contractionary monetary policy can reduce demand-pull pressures by raising the cost of borrowing, it cannot directly address supply-side logistics bottlenecks. Overcoming these cost-push pressures requires structural reforms. Investing in automated deep-water port infrastructure and upgrading inland rail freight networks will enhance long-term logistics efficiency. These supply-side initiatives aim to shift the long-run aggregate supply (LRAS) curve to the right, thereby dampening inflationary pressures and stabilizing domestic price levels.
Extract B states that "international maritime freight tariffs and container shipping costs have increased by 40% over the last twelve months".
Using an AD/AS diagram to help you, explain the effect that a rise in shipping and logistics costs 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.