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UK inflation rate has doubled last month, what impacts will this have on our economy?


The UK CPI inflation rate has doubled to 1.5% for April, an increase from 0.7% CPI in march 2021. the BBC reports. This has emerged as a result of the UK relaxing its coronavirus restrictions in April, to allow non-essential retail to return, at least for outdoor venues. This has meant consumers who have saved up their money during the course of lockdown now have the ability to spend once again, and subsequently are doing so, boosting the aggregate demand in the economy. This has caused prices to rise in the economy as the UK becomes more active, and so has the CPI figure, as illustrated by trading economics.

This steady rise of the rate of inflation is beneficial as it brings CPI inflation close to the UK’s target of 2%. This means as inflation is low and stable, businesses and consumers are able to plan ahead to the rises in prices and so are more confident with market conditions. This encourages consumer and business spending and can lead to economic growth. The BoE predicts an increase to 2.5% CPI by the end of 2021. This therefore will maintain the inflation rate within the target and get the UK back on track to re-cooperation.


The previous increase of price levels followed rising fuel prices. Similarly, this month’s CPI inflation rate rose due to rising transport costs, likely because of fuel prices and the increased vehicle traffic on the roads with the relaxation of lockdown restrictions. This has been due to the UK being advised against, but not illegal to travel across the country, as well as abroad as well to several green light countries, meaning car usage has risen massively and the UK once more becomes more active. This increase in usage has therefore boosted inflation; however, caused many problems in relation to the progress made in 2020 as we saw drastic cuts in CO2 PPM emissions. As pollution has risen again, this raises alarm bells over UK public health, as well as the fact that every 20 minutes a child is admitted to hospital with an asthma attack. This would mean more money would be required to be spent on vital NHS services and resultantly reduce the opportunity for government spending in the economy.


The rise of inflationary rates is also due to a rise in global oil prices and the expiry in September of covid emergency cuts to value-added tax (VAT), in the hospitality sector, as well as comparisons with the pandemic slump of 2020 (BBC). This however has amalgamated from various contributors, a list below shows exactly how much of each good/service category contributed to the 1.5% CPI figure.

Therefore, as demonstrated here, many different aspects of the economy have played a part in either boosting or restricting the UK’s rate of inflation for April.


Firstly, household services and transport dominated the chart. This is because a vast proportion of the UK population still operates from home amidst a health crisis. This has meant gas, water and electricity demand has been sky high for many months now, and as they are all price elastic, the rising prices have meant consumers still demand this, and so pay any price. As a result, this, along with many students and workers who rely on travel to get to work/education, have to persist on buying transport by car, bus or bike and therefore this remains a large contribution to the inflation rate.


However, this has been hindered because of a fall in the clothes and also food/beverage sales. Clothes sales have fallen as lockdown is still apparent, as well as consumers having little confidence to go out and about in nice new clothes in sociable areas, as we still undergo a health crisis.


A more major issue to this however is the reduction of purchasing powers, especially for the public sector who have seen a pay freeze and therefore reduced spending abilities as inflation rises. As a result, they can now buy fewer goods/services for the same amount of sterling pound, then they switch to inferior goods/ cut back on the amount of goods/services bought. As a result, this has caused a reduction in spending for normal food and drink and therefore reduced the rate of inflation because of that factor for those on fixed incomes.


On another aspect, Reuters has reported that the FTSE 100 has slipped as investors fear rising inflation may force the BoE to introduce contractionary monetary policy measures. This is in an attempt to achieve disinflation, more near the UK’s 2% target range. Therefore as the MPC (monetary policy committee) of the BoE would increase interest rates, this would mean investors would have to pay more interest on loans used to hold shares, and most likely receive less dividend as businesses struggle to service debts too.


Overall, rising UK inflation comes with many positive factors such as businesses and consumers can plan ahead which ultimately would breed much-needed confidence in the UK market. However, this has come with many issues, especially for those on fixed incomes or reduced wages, and as a result will hinder UK macroeconomic objectives such as to maximise utility and living standards, and so could consequently be criticized as a failure in the short term for the UK government's response to this seemingly perpetuating detrimental economic event.

 

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Written by Euan Taylor

Research compiled by Hubert Kucharski

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