A government receives two forecasts for the next year. In both forecasts, the CPI inflation rate is 5%.

Economic information	Forecast P	Forecast Q
Was the inflation expected?	Yes	No
Average pay increase	5%	2%
Interest paid on savings	5%	2%
Conditions facing firms	Consumer spending, output and employment are rising. Firms can pass most cost increases on through prices.	Energy and raw-material costs are rising sharply. Strong competition prevents firms from passing on the full increase. Output is falling and unemployment is rising.
Additional government tax receipts	£14 billion	£6 billion
Additional government spending on pensions and benefits	£9 billion	£11 billion

Evaluate which forecast would make the 5% inflation rate more damaging to the economy.

A government receives two forecasts for the next year. In both forecasts, the CPI inflation rate is 5%.

Economic information	Forecast P	Forecast Q
Was the inflation expected?	Yes	No
Average pay increase	5%	2%
Interest paid on savings	5%	2%
Conditions facing firms	Consumer spending, output and employment are rising. Firms can pass most cost increases on through prices.	Energy and raw-material costs are rising sharply. Strong competition prevents firms from passing on the full increase. Output is falling and unemployment is rising.
Additional government tax receipts	£14 billion	£6 billion
Additional government spending on pensions and benefits	£9 billion	£11 billion

Evaluate which forecast would make the 5% inflation rate more damaging to the economy.

3.4 Price stability

3.4 Price stability Questions