The Macroeconomic Impact of Higher Energy Prices on the UK Economy

Abstract

This article explores the macroeconomic impact of the rise in energy prices since 2004. The article discusses the various channels through which rising energy prices are likely to influence the degree of inflationary pressure in the UK economy. Rising energy costs put upward pressure on the prices of energy-intensive goods and services, and can affect both aggregate demand and potential supply. The adjustment of prices and quantities in the labour market are particularly important in this regard. Ultimately though the impact on inflation will depend on monetary policy and the behaviour of inflation expectations. Some past episodes in which energy prices increased sharply preceded a marked deterioration in the macroeconomic environment. The evidence so far suggests a more muted impact on the economy than in these previous cases.