Election 2024: What Is Inflation And Why Is It Important?
It's a key economic issue ...
Posted by Roger Eddowes on 24/06/2024 @ 8:00AM
Inflation is a term that is often thrown around during election season, but many people may not fully understand what it means and why it is important. In simple terms, inflation is the rate at which prices of goods and services are rising over time ...
As inflation increases, the purchasing power of the pound decreases, so it's more expensive to buy the same goods and services!
The main measure of inflation in the UK is the Consumer Prices Index (CPI), which tracks the prices of a basket of over 700 goods and services. This includes everyday items such as food and clothing, as well as more recent trends like air fryers. However, it is worth noting that different households may experience different levels of inflation depending on their spending habits.
"So, why does inflation matter?"
Well, for consumers, inflation can have a direct impact on their wallets. As prices rise, their money can buy less, meaning they may have to cut back on spending or dip into savings. For businesses, inflation can also pose challenges. As they face higher costs for inputs and wages, their profit margins may decrease. This can lead to businesses raising prices, but if consumers are not willing or able to pay, it can result in lower sales and potentially even job losses.
Now, let's take a look at the current state of inflation in the UK. Since April 2021, the UK experienced its biggest inflation surge in 40 years, with prices rising by 21%. This is 15% higher than it would have been if inflation had remained at the Bank of England's target of 2%. This means that in just three years, the UK effectively experienced over 10 years' worth of inflation growth.
But what does the future hold for UK inflation? The CPI as of May 2024 was 2.0% down from 2.3%, however, according to the Bank of England, inflation is expected to fall below the target in the near term, but rise again to 2.6% later in 2024 as the impact of recent drops in energy prices fades. However, the BoE also predicts that inflation will fall over the coming years, reaching 1.5% in 2026.
"So, what are some of the main challenges that the next government will face in managing inflation? "
Well, regardless of whether it's Labour or The Conservatives, one of the biggest challenges is the low labour supply. As employers compete for scarce employees, they may be forced to raise wages, which can add to inflationary pressures. This is especially true in industries that rely heavily on low-skilled workers, such as hospitality and retail.
External shocks can also have a significant impact on inflation. For example, the war in Ukraine caused a spike in energy prices a few years ago, and this had a knock-on effect on the prices of energy which led to far higher inflation.
As tensions continue between Russia and Ukraine, further disruptions to the global energy market could happen, although the West is weaning itself off cheap Russian oil and gas so the effects on inflation may be more muted.
"Inflation is a key economic issue that is at the forefront of the upcoming election 2024!
It is important for both individuals and businesses to understand its impact and the challenges that the next government will face in managing it. As a voter, it is crucial to consider each party's plans for managing inflation when making your decision at the polls.
But whoever you support, do remember to vote on July 4th.
Until next time ...
ROGER EDDOWES Business Godparent
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about inflation, it may be a great idea to call me on 01908 774320 and let's see how I can help you.
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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