UK inflation stays above target as food, labour and energy costs rise

Inflation in the UK remains stubbornly high—well above the Bank of England’s 2% CPI target—driven by persistent increases in food prices, rising labour costs and volatile energy bills feeding into the wider basket of goods and services. Supply-side pressures, such as disrupted global supply chains and weak productivity, mean firms continue to pass on higher costs to consumers. With inflation proving sticky, the Bank faces pressure to keep monetary policy tight, raising borrowing costs to curb demand—though this risks slower growth and higher unemployment.

UK inflation remains at 3.8% in August as food costs grow - BBC News

1. What is meant by inflation, and according to the article, which goods in the CPI basket are currently rising fastest in price?

2. The article highlights rising food, energy and labour costs. Explain how these act as cost-push pressures on inflation. Use an AD/AS diagram to illustrate how rising costs can cause inflation.

3. UK inflation remains above the Bank of England’s 2% target. Discuss the potential costs of persistently high inflation for different economic agents (e.g. households, firms, government) and for the wider economy.