Put simply, inflation is a general increase in prices and fall in the purchasing value of money. So, when the general price level rises, the pound in your pocket buys fewer goods (cars, lawnmowers, tins of beans) and services (hotels, restaurants, transport). Inflation corresponds to a reduction in the purchasing power of money. But what are the root causes? Well, higher wages increase household incomes and correlates with a rise in consumer spending. But though this tickles demand, the cost of actually producing the goods and services will rise as the production costs, in this case wages, increase. If these factors are at play during the best of times, what about the worst?
Well, external factors such as the hike in oil prices during the 1970s clearly impacts energy, production, transport and so forth. There are three major factors at play today:
Russia’s invasion of Ukraine resulted in a sharp rise in the cost of energy - global oil prices have increased by 11% and UK wholesale gas prices have increased by 40% since the invasion. And some food products - wheat and oilseed. The immediate contraction of supply resulted in significantly inflated prices.
Prior to this was the surge in demand for products after the Covid lockdowns came to an end. Businesses had problems meeting that sudden demand.
And Brexit, yes Brexit. Isolating the impact of Brexit isn't easy, especially with the effects of a pandemic and a war. But Mark Carney, the former governor of the Bank of England, claims Brexit plays a significant piece of the economic jigsaw. This is what he told the Daily Telegraph:
‘We laid out in advance of Brexit that this will be a negative supply shock for a period …and the consequence of that will be a weaker pound, higher inflation, and weaker growth, and that the central bank “will need to lean against that”. Now that’s exactly what’s happened. It’s happened in coincidence with other factors, but it is a unique aspect of the economic adjustment that’s going on here.’ He concluded: ‘There’s no joy in saying, well, “we told you so” because people are having to live with that reality.’