Get all your news in one place.
100’s of premium titles.
One app.
Start reading
The National (Scotland)
The National (Scotland)
National
Judith Duffy

Economics expert explains why inflation has reached a 40-year high

The Bank of England has raised interest rates to try to combat rising inflation

PRICES are continuing to rise at the fastest rate in 40 years, the latest figures show.

The inflation rate edged up from 9% in April to 9.1% in May, the highest since early 1982, according to the Office for National Statistics.

Filling up a family car with petrol is now around 30% more expensive than a year ago while the cost of using a gas-powered boiler has risen by 95.5%.

Everyday food items have also seen sharp increases, with pizza up by 12.3% and the rate of inflation for potatoes more than doubling to 5.1%. Air travel has gone up from 12.5% in April to 21.8% last month.

As the squeeze on household budgets continues, here we find out the reasons for inflation – and when it might end.

What’s causing high inflation?

The causes of inflation are no surprise to everyone paying any kind of bill – energy bills, fuel costs and food prices are all driving up the overall inflation rate.

But Professor Mairi Spowage, director of Strathclyde University’s Fraser of Allander Institute, points out that the roots of the issue began months ago.

“We started to see inflation rising considerably as the world opened up after the lockdowns associated with the pandemic,” she said.

“As the world economy started to ramp back up last summer, we saw significant supply chain disruptions which haven’t been fixed quite yet - the semiconductor shortage and so on, which put a lot of pressure on the prices of things like cars.

“That started to be quite inflationary in terms of the world economy opening up after the end of the pandemic.

“We also saw gas prices start to rise considerably over the summer and as we moved into the autumn, even well in advance of the Russian invasion of Ukraine.

“So these were already considerable inflationary pressures to the system, as early as last summer.”

Spowage said the Russian invasion of Ukraine saw the prices of oil, grain and cooking oil all shoot up – with recent estimates suggesting around three percentage points of the UK’s inflation at the moment is directly linked to the war.

When it comes to Brexit, she said there was no doubt it has disrupted trade between the UK and the EU, but the impact was difficult to unpick from Covid.

She added: “Undoubtedly it is contributing to labour shortages in this tight labour market we have, which will be contributing to wage inflation that we are seeing, particularly in the private sector.”

Can anything be done to tackle inflation?

The Bank of England, which is independent of the government, has already raised interest rates to 1.25%, their highest level in 13 years, in the hope of slowing inflation by encouraging people to borrow and spend less and save more.

Spowage said interest rate rises are likely to continue this year, adding to pressure on household budgets.

She said the UK Government was also likely to face increasing pressure to introduce extra measures to offer support with the cost of living, particularly energy costs.

“It goes hand in hand with discussions about public sector pay for the 20% or so of workers in the UK who work for the public sector in terms of how to reflect the cost of living better in pay packets,” she said.

“I expect that as this really starts to bite, in October especially when the [energy] price cap goes up again, there will be increased pressure on the government to help households through this difficult period we are going to go into in the winter.”

Will wages be able to keep pace with inflation?

As rail workers stage walkouts this week to demand better pay and conditions, some have argued that increasing wages will only further drive up inflation.

But Spowage said she had a “lot of sympathy” with workers who are facing an increased cost of living and had the right to withdraw their labour.

“It is all very well for those who have healthy salaries to criticise workers for trying to get a fair settlement, but people are really struggling and it is going to be quite difficult as we go into the winter,” she said.

“Obviously the Prime Minister talked in the past about a higher-wage economy, but the concern from some will be is that it does embed inflation into the economy and it does become more pernicious and difficult to deal with.

“These are really tough questions and a really difficult balancing act for the government.”

How long will it last?

Spowage pointed out that a “little bit” of inflation can help to stimulate the economy, which is why the usual target for inflation is generally about 2% around the world.

She said the Bank of England will be seeking to lower inflation down as quickly as possible to that more ‘normal’ level.

But she added: “You can see from the last few meetings they have had, that they are expecting this is going to be more longer lasting than we previously thought and it is likely to be into 2024 before they get back down to more normal target levels of inflation.

“What we are likely to see though is inflation will probably peak in October as the price cap on energy for consumers goes up again.

“But once we get to the end of this year we will be comparing price levels to quite high levels from last year, so it means the rate of inflation compared to a year earlier is likely to start coming down.”

However she cautioned that price levels will still remain quite high, adding to difficulties for households.

“There is what happens in the meantime in terms of pressure on household budgets and potentially the impact on the economy,” she added.

“The Bank of England are predicting for example there is going to be quite a severe contraction in the economy in the last quarter of this year due to all of these pressures – so that is pretty worrying in terms of the economic outlook.”

Should more have been done to prevent inflation rising?

There has been criticism of the Bank of England for failing to pay enough attention to the potential for inflationary pressures after the economy opened up post-covid, Spowage said.

But she added: “That is easy to say in hindsight, it is always a difficult balancing act not wanting to choke off this fledgling economic recovery after covid when to raise interest rates to stave off that inflationary pressure.

“It is a difficult one – it will be probably good in the long run if the economy gets back to a more ‘normal’ interest rate level than we have seen since the financial crisis.

“If we are at very low levels of interest rate, that gives them very little room for manoeuvre, so in the long run of we get back to a more normal level of interest rate that will give the Bank of England more tools to help support the economy in the future.”

Sign up to read this article
Read news from 100’s of titles, curated specifically for you.
Already a member? Sign in here
Related Stories
Top stories on inkl right now
One subscription that gives you access to news from hundreds of sites
Already a member? Sign in here
Our Picks
Fourteen days free
Download the app
One app. One membership.
100+ trusted global sources.