Inflation in the UK threatens a permanent state

August saw UK consumer price inflation rise by 3.2percent year-on-year, the highest annual rise in nearly a decade.

This percentage is higher than the average 2% recorded in July, making it the largest month-on-month rise since records began in 1997.

Inflation is also a problem beyond the United Kingdom, for example, the rate of inflation 5.3% in the United States.

Economists at the Bank of England attribute these huge rises to temporary factors, claiming that inflation will soon stop rising, without the need for major intervention.

They also explain that prices last year were artificially low, and as they returned to more “normal” levels, we would expect to see high inflation measures.

An example of this is gasoline prices, as the weak demand for mobility has helped reduce them to about 113 pence per gallon per year 2020However, with travel back to pre-pandemic levels, the increased demand for gasoline has pushed prices around 135 pence.

However, not all price hikes can be attributed to temporary factors, there are also deeper structural factors at play.

What causes inflation?

Inflation is measured by the UK's Office for National Statistics, which records the prices of thousands of products, and these prices are determined by the never-ending interaction of supply and demand in the economy (assuming the government does not intervene to fix prices in some way).

An abundance of surplus products or services means the possibility of lower prices, as we have seen with gasoline prices.

On the other hand, the demand for products that cannot be fully met the demand, usually leads to higher prices, this happened with sterilization materials in a year 2020, for example, and more recently with used cars.

Ten years of inflation in the UK

Besides the Corona pandemic, the UK’s exit from the European Union has certainly affected prices, as trade with neighboring countries has become more difficult and expensive, and this contributes to a shortage of products, which leads to higher prices.

Another structural factor linked to inflation is the pound, as the UK imports hundreds of billions of pounds worth of consumer products and raw materials.

With the depreciation of the pound, the state is paying more of its currency to buy products from abroad, which makes these products more expensive.

The pound has already been weakening against its rivals for several years, due to economic factors such as weak productivity, and this downward path is also likely to continue due to political factors such as the looming second referendum on Scottish independence and civil unrest in Northern Ireland.

So what are the possible solutions?

Slight inflation in the economy can be positive, and it can even induce consumers to buy things before prices rise, and it is also a way to reduce government debt in real terms.

However, high inflation is a problem, because it erodes the real income of individuals, which means that they consume less, and thus corporate profits will be lower in turn.

Therefore, the UK government and the Bank of England must work to address some of the long-term structural factors, which can make high inflation a persistent case, especially when “supply shocks”, such as the new Covid variable (delta variable), or sanctions can trigger Trade on China, to increase the imbalance between supply and demand, in the short to medium term.

Addressing the shortage of people and skills in the labor market is essential, before the UK's productive capacity is affected by more companies relocating.

Free trade in products and services with the European Union is also critical to the country's long-term competitiveness, albeit a difficult one.

The EU will never accept the existential risk of a country benefiting from its massive free market, without fully participating in its policies and regulations.

Damage control appears to be the only way forward here, underlining the importance of a lasting agreement with the EU on Northern Ireland.

Too plentiful money and very low interest rates not only inflate asset prices, but also boost corporate borrowing, providing a temporary lifeline, paving the way for the next crisis.