The UK inflation rate hit 2.5% in the year to June, the highest for nearly three years. Economists’ debate as to whether this a spike, a trend or a statistical error. Time will tell but one thing is certain the rise is because of lockdown.
Inflation is a worry, not least because it increases the tension between the haves and the have nots – the haves can absorb the increases in price and the have nots cannot.
Inflation is the rate at which prices are rising – if the cost of a £1 jar of peanut butter rises by 6p peanut butter inflation is 6%.
The effect of inflation on people’s behaviour and mood is well documented if inflation goes up and your income stays the same – you can buy less which leads to tension and stress. This will affect the young saddled with student debts trying to buy a home, the poor and those with fixed overheads but who may have lost their jobs due to covid and struggle to reduce their costs.
For some wealthy homeowners with a mortgage, they may see the value of their houses increase as the debt remains the same which makes them feel good. For those trying to buy a home for the first time – they see house prices go up disappear and are miserable as they see their dream of home ownership slip ever further away.
A bit of inflation is seen as good, which is why the Bank of England like to keep the target of inflation at 2%, it encourages people to spend – to buy now rather than wait for a few months – when the price may be higher which is good for business and the economy.
However, if prices start rising too quickly it is a sign that demand is outstripping supply and the economy is running into difficulties. The Bank of England at times like this will often tackle this by raising interest rates. This affects the cost of mortgages, student loans, and other borrowing costs thereby restricting the amount of money people have to spend, it affects demand and dampens prices rising.
For inflation proofed business owners or professionals with inflation linked incomes – they may not have financial concerns, but they may fear for their safety as the have nots turn to crime, theft, and burglary and in extreme cases other forms of violence – such as kidnap.
Of course, not all businesses are inflation proofed, and many simply cannot pass on the increase in costs from their suppliers to their customer because the customer simply will not buy at the higher price – so for products and services the cost goes up for the customer and for others the business takes the hit, and the price remains the same.
The ongoing debate amongst economists is whether the increase that we have seen is a spike due to covid which will peak and then go back to normal, or whether this is a trend which will continue.
Some reckon that inflation is likely to reach 3% but not much higher, before returning to ‘normal’ of 2%. Others reckon it could continue to rise to 4% by the end of the year – due to global supply shortages due to the pandemic which will take much longer than a few months to readjust.
Interest rates are currently at 0.1% and are unlikely to change for the rest of the year
The Office of National Statistics (ONS) keeps an eye on the prices of thousands of everyday items, from car cleaning to petrol. This is known as the ‘basket of goods’ and is constantly being updated or ‘weighted’, according to what is being bought by the average household.
As you can imagine items such as hand sanitisers and home exercise equipment has been adjusted to reflect lockdown this year but was it done at the right time and accurately? Others take the view that the ONS did not react quickly enough to the impact on human behaviour and spending under lockdown and the increase in inflation is merely a statistical error in reweighing certain products and items to reflect this, working from home, not able to go out to restaurants, travel or go to any social activity and so inflation appears to have spiked but could be a statistical error!
Who is right time will tell – and the debate will no doubt continue?
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