Leeds Beckett University - City Campus,
Woodhouse Lane,
LS1 3HE
UK inflation soars to highest rate in 30 years
Professor Mark Rhodes, Head of Economics, Analytics, and International Business, offers his insights into the UK’s current rate of inflation. Mark, in his own words, explores the factors that have led to inflation reaching its highest peak in 30 years and what we can expect to see in the future as a result.
The cost of buying goods and services in the UK rose by 5.4% in the year to December 2021. This is the highest rate of inflation for 30 years. This rise in the inflation figures has been driven by the cost of food, including non-alcoholic beverages, restaurants, hotels, furniture household goods and also by rises in the costs of buying clothing and footwear.
Energy prices may be driving the rise in Inflation as well as bottlenecks in some international supply chains such as semiconductors (as the delivery of new cars is delayed the demand for used cars and as a result their prices has risen rapidly for example).
As well as factors external to the UK economy, such as global energy prices, there have been domestic factors, such as rising wage inflation, that may have put pressure on prices. Overall, however, real wages have been falling as increases in wages have not been enough to compensate for higher costs of living.
The Bank of England is given the task of managing inflation for the UK and will have to explain to government why It has exceeded its inflation target of 2%. The main tool used by the bank is interest rates and there is likely some pressure now for it to increase its interest rates as it did in December to try and get to grips with inflation. Despite this we might not expect very large rises in rates as they do not work well where so much of inflation is driven by factors outside the UK. Our central bank has also been quite reluctant to raise interest rates by a large amount during the pandemic. We may see other policy responses particularly to (insulate!) domestic customers from the projected large rise in domestic energy prices. It is also possible that we might see reductions in tax rates on some types of energy over the short term.
These are difficult and uncharted waters for governments and central banks to navigate, with few precedents to guide economic responses to the pandemic as well as rises in international energy prices and disruption to supply chains.
Professor Mark Rhodes
Mark Rhodes is Head of Subject for the Economics, Analytics and International Business Subject Group.
