Inflation is a rise in the general-price-level of goods and services and is problematic when

sustained and inordinate. Two types of inflation exist,demand-pull which caused by a rise in
aggregate-demand ,(total demand for domestically produced goods and services), and
services and cost-push which caused by reduction of aggregate supply,(total supply of
domestically-produced goods and services) .The time-period is 2016-2019(Brexit-era) where
predictions say UK that inflation will exceed optimal low-inflation range of 1-3% to 4.2%.
Fiscal and monetary-policies involving manipulating government expenditure/taxation and
interest-rate by the central bank respectively could be used. This essay discusses
management-policies targeting both types of inflation before comparing their relative-
merits and taking an overall-stand on the best policy.

Firstly, exchange rate policies could be used as a monetary-policy by the Bank-of-England

to strengthen GPB. Amidst political and economic instability during Brexit, GPB-devaluation
occured due to poor market-expectations and sale-of-GBP. Thus less foreign-goods can be
bought with the same amount of GBP, hence indicating a rise in price of imports. Eg. gas and
electricity bills rose by £2bn after 2016’s referendum as Britain is heavily reliant on gas imports .
Hence aggregate-supply of these resources and related services like power and transport will
decrease as cost-of-production rises, causing cost-push-inflation. Exchange-rate-policies
allowing usage of reserves like UK’s Exchange-Equalisation-Account to buy,sell gold/ foreign
currencies to increase GBP’s value will be useful to prevent such a situation.

Nevertheless, it is short-term as eventually UK will run out of reserves and exchange-rate will
fall again,causing inflation. Britain has already forked-up an unsustainable $146bn for the
Exchange-Equlaisation-Account in-case-of no-deal Brexit.

Secondly,taxes on domestically-produced goods and services could be used by the

government as a contractionary-fiscal-policy. From the source,Ben Broadbent,a member of
the bank’s monetary-policy-board, suggested in 2017 that with the European-market less-
accessible,British-households and firms might try to source for products closer to home. Hence
this directly increases demand for domestically-produced goods and services in
consumption( of consumer goods and services such as daily necessities) and in investment
(in capital-goods which increase production).This also applies to government-spending on
goods and services such as military-technology.Hence aggregate-demand increases which
results in demand-pull inflation. Hence taxes discourage further consumption of domestically-
produced resources in consumption and investment by limiting disposable-income and
profits. Furthermore, the revenue from taxes could be used to increase government
spending on imported instead of domestically-produced resources,reducing the cost of net-
exports, thus reducing aggregate demand and demand-pull inflation.

Nevertheless,it is politically-unpopular and will erode people’s support for the government,
adding to political-instability,reducing investment due to poor-outlook and aggregate-
supply,causing inflation.Taxation can be useless as consumers and firms will buy goods-and-
services without government-constraint in black-markets.

Finally, interest-rates should be decreased as a monetary-policy by Bank-of-England.

According to the provided-source,Lloyds-Banking-group, optimism among firms is at its
lowest in 7 years and that businesses have recorded the longest continuous decline in
investment since the 2008-financial-crisis. This is mostly due to Brexit,instability,poor-
market-expectations as mentioned earlier. This affects the quantity and quality of resources
as less money is invested by firms in labour (such as employment,training) in land (such as
reclamation,mining) and in capital (such as machinery,infrastructure). Likewise,aggregate-
supply decreases and causes cost-push-inflation Thus, interest-rates should be decreased
to encourage borrowing for investment purposes over saving as expected-profits are
higher as opportunity-cost of earning through interest by saving money in banks is decreased.
Firms are likely to follow this monetary-policy as they are profit-driven(economic-
theory).Unlike taxation which also involves the this theory ,it is not likely to have similar
negative side-effects as it mainly targets firms who are not compelled-to buy products like
basic-necessities like consumers.Rather they buy so-long it is profitable.

Theoretically, it risks demand-pull inflation as investment and aggregate-demand

increases.It’s unlikely due-to worsening political-stability(no-deal Brexit) .Consequently both
consumers and firms will be wary of investing due to poor-outlook.With more parties
slowing-down aggregate-demand,aggregate-supply increases faster than aggregate-
demand with reduced-interest-rates,causing overall-deflation.

In-conclusion,the best management-policy is reducing-interest-rates .

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References
● Szalay, E. (2019, May 16). UK Treasury prepared currency war chest for Brexit, says
BofA. Retrieved from https://www.ft.com/content/edc5c10c-77c6-11e9-bbad-
7c18c0ea0201

● Ambrose, J., 2020. UK Energy Price Fears As Electricity Imports Climb To Record
High.the Guardian. Retrieved from https://www.theguardian.com/money/2019/sep/01/uk-
energy-price-fears-as-electricity-imports-climb-to-record-high