Target 2.0

Economics - Cost and Prices

Over the past 3 months the prices of oil have fallen steeply by around 22% from the same month last year, meaning the the price of oil has fallen to around US $78 per barrel. The graph shows a that in the first quarter prices fell, then picked up again in the second quarter and began to rise, however prices began to fall sharply in the third quarter and fourth quarter. The economic impacts to the UK means that production costs should falls so in microeconomic terms firms should be able to produce more for less, thus increase the capacity in the short term, therefore in macroeconomics terms this will lower the price level, as this would cause the SRAS to shift right. This will therefore put downward pressure on the headline rate of inflation. The sell-off reflects expectations of a continued market surplus owing to weak demand, large supply growth, higher stocks and little indication from OPEC that it will cut production to stem the price slide. Crude oil demand has been weak seasonally because of autumn refinery maintenance, and global oil consumption growth more broadly was very sluggish in the 2nd and 3rd quarters. Surging oil supply growth is at the heart of the surplus, led by shale oil production in the U.S. which has forced out light oil imports from West Africa, and increasingly medium sour crude from the Middle East and elsewhere. A direct effect of lower oil prices might be seen in the form of lower prices paid by households for goods such as petrol. In September 2014, 11 pence in every pound spent in UK retail outlets was accounted for by automotive fuel outlets such as petrol stations.

Consumer Price Index

The Consumer Price Index took a downward trending line. One explanation for some of the recent weakness of inflation could be that the pass-through to lower consumer prices of the appreciation of