Explain the reason why the UK government aims for a low inflation rate
• Menu costs which costs businesses in terms of updating menus, vending machines, price lists, etc.
• Shoe leather costs add to the search costs for individual and businesses looking for price comparisons.
• Uncompetitive exports which result if UK prices rise faster than foreign price levels.
• High interest rates needed to lower inflation which affects borrowers – which account for most people in the economy.
• There are other problems caused by higher inflation which should be credited.
• In addition, problems of deflation can also be used to explain why low inflation is preferred, e.g. deflation can lead to postponement of purchases as people wait for prices to fall further.
• Impact on cost of living