Economics: Will inflation solve itself in the next year?
DGS ran a Philosophy, Politics and Economics essay competition in summer 2023. Our students were tasked with answering a question that probed into one of the areas of PPE. The best essays were ones that argued clearly and concisely. To see for yourself, please read on below!
Winner of the Economics category: Stephen E, 9B
Due to a number of causes, including supply chain interruptions, rising energy prices, and increased demand as the economy recovers from the epidemic, the UK economy has seen higher inflation rates over the past year. The Consumer Price Index (CPI) climbed to 3.2% in September 2021, according to data from the Office for National Statistics, the highest level in more than nine years. While the Bank of England has stated that it is confident that inflation will eventually return to its objective of 2%, several experts are concerned that the current inflationary pressures may last longer than expected. This essay will look at what causes inflation in the UK, what might happen if it stays high, and whether or not inflation will stabilise next year.
Supply chain disruptions, which have been brought on by a number of variables including the COVID-19 epidemic, Brexit, and a global scarcity of raw materials, are one of the main causes of UK inflation. Due to these delays, prices for goods and services have increased, and there are already shortages of several products. For instance, a lack of semiconductors has resulted in higher pricing for gadgets, while a lack of workers has increased wages and the cost of services. Depending on how serious the underlying problems are, some of these supply chain disruptions may only last a short time, while others may last longer.
Rising energy prices, which have been fueled by a variety of causes including increased demand from emerging economies, supply interruptions brought on by extreme weather occurrences, and decreased investment in new production capacity, are another factor contributing to UK inflation. Higher energy costs have increased corporate expenses and thus raised consumer prices. Energy price increases have the potential to drive up inflation in the UK for some time if they continue.
According to ‘The Guardian’: “The most important factor putting pressure on prices is the global energy squeeze; we are seeing increasing prices for gas, petrol and coal. Global demand for fossil fuels is rebounding strongly as the pandemic eases – and it is conspiring with a few other factors. Among them is that last winter was unusually cold, which not only increased demand for gas in homes in the UK but also across the globe, driving up prices internationally. Moreover, Russia is supplying less gas than expected, possibly for political reasons, further increasing prices. Oil prices too have shot back up to pre-pandemic levels. All the while, the UK government has made disappointingly slow progress in insulating its homes and building transport infrastructure that does not require fossil fuels. Had there been more progress on the phasing out of fossil fuels from our economy, the energy squeeze would be hitting us less hard.”
For the UK economy, the effects of persistently high inflation may be significant. Higher inflation reduces the purchasing power of money, which over time allows customers to make fewer purchases. Consumer spending may decline as a result, slowing economic expansion. High inflation can also cause wage pressures since workers need to be paid more to keep up with rising costs. Further inflationary pressures may result as a result of businesses passing along greater labour expenses to customers. A loss of trust in the UK economy, both domestically and internationally, may result from continued high inflation.
There are grounds to be hopeful that UK inflation will stabilise next year, though. For starters, as the global economy continues to recover from the pandemic, some of the supply chain disruptions that have been fueling inflation may ease. Additionally, central banks all around the world are addressing inflationary pressures by lowering monetary stimulus and boosting interest rates. While these actions might slow economic development in the short term, they might also contribute to stabilising inflation over the long run.
The UK government has also disclosed a number of initiatives intended to promote economic expansion and alleviate supply chain problems. For instance, the government has made plans to invest in new infrastructure, such as highways, rail lines, and broadband networks, which may assist to boost economic activity and, in the long run, alleviate supply chain difficulties. Additionally, the government has announced a number of initiatives to aid businesses, such as tax incentives and subsidies, which may help to lessen the burden on them and lower their expenses.
According to ‘Forbes Advisor’: “The reason inflation is deep in double-figure territory is thanks to a toxic cocktail of economic conditions. These include the knock-on from soaring energy prices – triggered in large part by the war in Ukraine – coupled with rising interest rates and global supply chain bottlenecks.”
In conclusion, despite the fact that UK inflation is currently high, there are reasons to be hopeful that it will go down next year. As the global economy continues to recover from the epidemic, some of the reasons causing inflation, such as supply chain disruptions and higher energy prices, may last longer while others may become less significant.