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Inflation Rates Soar- How Should We Deal With Them?


CPI inflation rates are currently at a shocking 5.5%, following a 0.01% increase in just one month from 5.4% in January, an inflation rate far outweighing the Bank of England’s goal of keeping inflation at a steady rate of 2%.The average cost to workers in the country is only likely to be heightened due to National Insurance Contributions forecast to increase by 1.25% from April, whilst a new energy price cap is set to come into effect in April, adding a further £693 a year to the average household bill. These exponential inflation rates are worsened still by the rising wages for certain workers, this coupling leading to fiscal drag as ‘The Centre of Economics and Business Research’ (CEBR) has warned that more than 9 million workers will pay more tax because of a tax freeze that will be instituted and will not change dependent on CPI inflation rates.


In a bid to calm inflation, the IMF has released a report reevaluating the UK economy, in which they have stated that the UK government should go ahead with tax rises to ease inflationary pressures, the IMF has called on Rishi Sunak to proceed with tax increases planned in the UK’s budget to ensure that inflationary pressures within the nation are stifled and that public finances are supported with higher tax inflows. Moreover, tax hike will reduce consumption, yielding a fall in aggregate demand, reducing inflationary pressures.


However, there are several criticisms of this strategy, including the concern that, due to current inflationary pressures being cost-push, as evidenced by rising gas prices & international shipping costs, changes in aggregate demand are unlikely to ease inflationary pressure.

Yet, five million lower-paid workers could have to pay income tax for the first time as a result of the measures, with another four million workers will be dragged into the higher income tax bracket, which will see them pay 40% tax on their earnings, as the UK sees its biggest cost of living squeeze yet. The think tank said the freezing of tax allowances and "bad forecasting of inflation" meant the number of people paying the higher rate of income tax will almost double to 8.1million.


However, the IMF states that these tax hikes should be targeted at richer, higher-income earners as opposed to poorer households, which would substantially negate this concern and would allow the government to raise £40billion which would aid in debt alleviation, as the UK government borrowed record amounts throughout the COVID-19 pandemic, resulting in total public sector debt reaching a peak of £2.4 trillion.


 

Written by Maya Hood

Research compiled by Hubert Kucharski

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