With reference to the information provided and your own knowledge, examine two factors which might explain the change in the rate of UK inflation as shown in Figure 2.
| Year | Price of one pound in US dollars (approx. annual average) |
|---|---|
| 2015 | 1.53 |
| 2016 | 1.35 |
| 2017 | 1.29 |
| 2018 | 1.33 |
| 2019 | 1.27 |
| 2020 | 1.28 |
| Year | Annual percentage change in prices (CPI) |
|---|---|
| 2016 | 0.7 |
| 2017 | 2.7 |
| 2018 | 2.5 |
| 2019 | 1.8 |
| 2020 | 0.9 |
The Bank of England's Monetary Policy Committee (MPC) faced a volatile macroeconomic landscape between 2016 and 2020. Following the June 2016 European Union referendum, a sharp depreciation in the value of sterling immediately began to impact the UK economy. By mid-2017, this currency weakness had fed directly into the prices of imported food, fuel, and raw materials, pushing consumer price inflation well above the Bank's official 2.0% target.
In response to these cost-push pressures, the MPC raised the base interest rate twice—first to 0.5% in November 2017, and then to 0.75% in August 2018—aiming to prevent high inflation from becoming embedded in wage negotiations.
However, by late 2018 and throughout 2019, global economic headwinds and domestic uncertainty cooled household spending and business investment. Global crude oil prices fell from over 80abarrelinlate2018tobelow 80 a barrel in late 2018 to below \,80abarrelinlate2018tobelow60 in 2019, reducing domestic energy bills. By early 2020, the onset of the global pandemic prompted the Bank of England to implement emergency monetary stimulus, slashing interest rates to an all-time low of 0.1% and expanding its quantitative easing (QE) asset purchase programme by an additional £200 billion. Despite this massive injection of liquidity, weak consumer demand and temporary cuts to shopping and hospitality VAT rates caused CPI inflation to plunge to just 0.9% for the year.
