Explain why a “fall in sterling is likely to push up CPI inflation in the short term” in the UK (Extract 1)

Sterling Depreciation: When the value of the UK's currency, the sterling, falls, it means that the sterling is worth less compared to other currencies. This is also known as sterling depreciation.

Import Costs: A fall in sterling increases the cost of imports. This is because more sterling is needed to buy the same amount of foreign goods or services. The UK is a country that imports a significant amount of goods and services, so a fall in sterling makes these imports more expensive.

Higher Production Costs: For UK businesses that rely on imported raw materials or components, their production costs will increase due to the more expensive imports. These businesses may then choose to pass on these higher costs to consumers by increasing their prices.

Consumer Price Index (CPI) Inflation: The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services. If businesses increase their prices due to higher production costs, this will push up the CPI.

Inflation in the Short Term: Therefore, a fall in sterling is likely to push up CPI inflation in the short term. This is because the effects of a fall in sterling (i.e., more expensive imports and higher production costs) can be felt quite quickly by businesses and consumers. However, in the long term, other factors such as changes in demand and supply conditions, productivity levels, and government policies can also influence CPI inflation.