Inflation – a rise in the cost of living – used to be a huge problem in the UK. Is it about to become one again?
Claudia Williams: Hi, I’m Claudia and this is the Sensemaker.
One story every day to make sense of the world.
Today, why your bills are going up and your wallet is getting lighter.
Does your jaw drop when you get to the till at the end of a weekly shop… or when you see the numbers ticking up at the fuel pump?
You aren’t alone. The reason? Inflation.
But what actually… is inflation? And how does it affect you?
Let’s start with a definition.
It’s pretty simple really: inflation is the increase in the cost of goods and services across the economy year on year.
So, if you bought a pint for a fiver in October 2020 but paid £5.25 for the same beer today… that means inflation is running at 5 percent.
The price of beer is just one thing that’s measured to gauge what’s happening to inflation.
To get an accurate measure across the economy, we look at what’s in a so-called “virtual basket” of 720 goods and services – from a loaf of bread to getting your nails done.
The Office for National Statistics is in charge of the calculations. And once it’s recorded the fluctuations in price we have something called the Consumer Price Index or CPI.
It’s a way for governments, economists, banks – and you and me – to judge the health of the economy.
In a way, it’s just like a balloon: with just the right amount of air it stays afloat nicely, but too much or too little and there’s trouble.
Ideally, the ‘Goldilocks’ level of inflation – where the economy is neither too hot nor too cold but just right – that’s around 2 percent.
And it’s the job of the Bank of England to keep it that way.
Currently – it’s 3.2 percent and rising.
So why is inflation a big deal right now? Why is it going up sharply and what impact is it having?
We spoke to Daniel Tomlinson to help us find out.
He’s a Senior Economist at the Resolution Foundation, an independent think-tank that researches income inequality and living standards.
“Inflation in the UK is going up. The Bank of England, in its latest forecast for inflation this year, expected inflation to reach around 4% towards the back end of this year. And then that it did expect it to fall quite quickly and be a transitory period of high inflation. Which is what we all hope it will be, but we don’t know.”Daniel Tomlinson, Senior Economist, Resolution Foundation
“Transitory” means “not permanent”. So that’s a good thing, right? It’s only temporary.
Well, predicting what’s happening to inflation is tricky at the best of times – and the times right now, as we come out of lockdown, are more volatile than they’ve been for a long time…
Add to that Brexit and global supply chains issues… a lot for economists to be keeping track of – and to predict.
So what’s the impact on us and our wallets?
“The big picture is that if wage rises or other cost pressures lead to higher inflation across the economy. That is bad for all of us. Because we all spend money.”Daniel Tomlinson, Senior Economist, Resolution Foundation
And it’s already happening. Poultry suppliers have warned chicken prices may rise by 10% as farmers pay more for feed and energy.
We are also paying an additional £13 to fill our cars with petrol compared with last year – it’s even more if you use diesel.
Energy bills are on the rise too – and fast.
“We can see that one of the most significant drivers of higher inflation and the Bank of England revising up its inflation forecast is the thing that we’ve all been reading about in the news, which is higher energy costs.”Daniel Tomlinson, Senior Economist, Resolution Foundation
Other sectors seeing prices increase include restaurants, hotels and recreation.
The result is A dent in our pay packets.
And that’s the other thing – labour shortages and wages have their part to play in rising inflation.
Take poultry farmers: if they need to hire more staff they might have to pay more to get them to do the work.
If the farmer decides to take the hit and have lower profits then his higher labour costs won’t be passed on to consumers.
The trouble is, it doesn’t always – if ever – work out like that. The usual result is higher prices… which in turn trigger higher inflation.
So how worried should we be about inflation?
Not at all, according to Boris Johnson.
“People have been worrying about inflation for a very long time. I am looking at robust economic growth –and by the way those fears have been unfounded –I think the supply chain and systems we have are incredibly clever and robust and supply will meet demand.”Prime Minister Boris Johnson
But do Rishi Sunak and the Bank of England don’t necessarily share his optimism.? It’s thought not.
The Prime Minister says the current shortage of supply can help workers by pushing up their pay.
But the Chancellor has also said increasing wages without an increase in productivity could push up prices even more.
As I explained earlier, the Bank of England’s job is to keep rates at that ‘Goldilocks’ 2 percent level.
And the way to do that is managing interest rates.
“We have said very clearly that if we see this becoming a pattern and we see this risk growing we would have to act as a central bank and we would have to increase interest rates.”Andrew Bailey, Governor of the Bank of England
That was Andrew Bailey – the governor of the Bank of England – in August.
Increasing interest rates makes borrowing money for things like our mortgages and business loans more expensive.
But just like managing inflation, tweaking interest rates is a balancing act. Increase the rates too much and you could slow down the post-pandemic recovery.
So the next few months will be a waiting game – and it may be a hard winter ahead for some.
Today’s episode was written by Phoebe Davis and produced by Imy Harper.
With additional reporting by Jacob Wood.
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