Inflation seems to be going up and up these days. Most economists put responsibility firmly at the door of the pandemic followed by the war in Ukraine. Unfortunately, the mainstream media blames Liz Truss and Kwasi Kwarteng ...
However, up until recently, inflation has been at historic lows thanks to the controlling influence of an independent Bank of England. But it reached 9% in April and the BoE expects it to rise to 11% in October. Just to remind you, inflation was at 1.6% in April 2021.
Following the pandemic, inflation began to increase due to economies opening back up, supply chains and labour markets picking up and increasing energy costs. It was initially thought to be a transitory effect and would cool off as Furlough ended.
The chip shortage during the pandemic and the subsequent war in Ukraine has a lot to answer for. The chip shortage drove up the price of anything that used microelectronics and the war inflated energy costs.
Now, we are seeing interest rates go up in an attempt to reduce overall inflation. The US Federal Bank took the lead and was followed shortly after by the BoE which has gradually been increasing the UK interest rate little by little over time, now at 2.25%.
The critical issue here is that the supply chains, the labour markets and energy supplies are taking longer to normalise than anyone expects. Chips are coming in thick and fast now, but manufacturers are taking time to ramp up production. There are jobs aplenty in the UK, but they're still not all paid the National Living Wage, and securing alternative gas supplies from around the world (when everyone else is trying to grab them too) keeps energy costs high.
All of these issues are not just happening in the UK. It is a global phenomenon, but I do have to admit that Brexit hasn't helped us with additional trade frictions between the UK and our friends in Europe. it's driven up wholesale costs, which in turn, increases retail pricing.
It's expected that inflation will start to fall in the spring, though it is stubborn, so that may be the summer before we feel any noticeable changes. Low growth will keep inflation high.
Although Liz Truss and her chancellor Kwasi Kwarteng immediately introduced a high-growth economic strategy when they took office, there was so much outrage over things like the cut of the 45% tax rate that she had to U-turn sharpish, which will reduce the amount of growth we are likely to see anytime soon.
Let's hope their Autumn Budget at the end of October will be fully costed and backed up by the Office of Budget Responsibility, or the markets will go haywire again, and both the Labour Party and the mainstream media will have a meltdown.
My prediction is that we may see a recession for a couple of quarters at most, then things will pick up. Maybe only for one quarter if the Autumn Budget goes well and growth picks up quicker. It's currently at 0.2% though Liz Truss wants to get it over 2.5% as soon as she can which would put us well ahead of the rest of the G7 countries!
Gross Domestic Product recovered quite a lot after the pandemic, but what most of us didn't see was the amount of Government debt, working patterns, travel, war and a whole host of other behind-the-scenes factors that will take many months, if not years, to play out.
We certainly live in interesting economic times.
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