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The Spectre of Inflation in the United Kingdom

What with the advent of the arrival of the new UK Prime Minister Liz Truss, the Conservative party leader – through her Chancellor of the Exchequer Kwasi Kwarteng – decided to make such profound tax cuts that they haven’t been seen in 50 years. Her motivations will no doubt have had a political taint, but they will also have been for practical reasons. One of these will have been in response to the four-decade record high inflation rate that likely struck in May of this year. This article takes a look at that inflation…

Definition of Inflation

Inflation is, essentially, the rate at which goods and services rise across a county’s economy. There are various drivers that have an effect and figure one attempt to summarize them. Three out of the four drivers are vaguer and can be applied to various industries across various countries across different spans of time. The more specific one is that of the housing market.

The real estate market in the UK – as well as many developed economies throughout the world – has evolved to have a huge bearing on a country’s financials, as was demonstrated painfully by the 2007-08 financial crash. In broad terms, a great deal of the factors affecting inflation fall into the rudimentary economic theories that govern supply and demand.

If demand increases for a given commodity, merchandise, or service, concepts of capitalism say that they will become more valuable and their price will increase. If the population of a given country has more disposable income, they are likely to want to buy more things and therefore commodities, merchandise, and services, become more expensive.

In turn, this may then create more wealth for that population and so the cycle continues. The cost of goods and services becomes inflationary.

Over time, as pointed out by the European Central Bank, inflation devalues the currency of a country or region: the buying power of that population is diluted and therefore that population requires more money to sustain itself. In the UK, the Bank of England (BoE) sets a target rate of inflation at 2% (the UK government has a considered ‘basket’ of commodities to watch and control since price variation is more important in some commodities than others – such as fuel and energy).

Figure 1: Factors affecting inflation (Investopedia)

Gradual, small, and sustained inflation is both expected and can be beneficial. When inflation becomes erratic, it can be destructive to an economy and even fatal. In Zimbabwe, for example, the price level increased by 80,000,000,000% in the space of a month through 2007-2009. The economy there collapsed. The population rejected the use of Zimbabwean bank notes (for good reason) and the consequences became inevitable.


According to Bloomberg, UK inflation ‘probably’ reached a four-decade high in May this year. In response, the BoE is considering increasing interest rates. In fact, the BoE anticipates that inflation will rise above 11% in 2022 (and maybe as high as 13%).

At the time of Bloomberg’s reporting in June, the interest rate had been raised consecutively five times, and by a quarter point. Should inflation continue to balloon, the expectation is that a more comprehensive upward shift of the interest rate will be needed to make sure inflation is brought to heel.

Despite the elemental causes and effects of inflation as set out above, it would be erroneous to come to the conclusion that inflation is a simple creature. As this article was in the process of being written, the Guardian reported on how the International Monetary Fund (IMF), in a rare public criticism of a globally driving economy, has attacked the tax-cutting measures undertaken by Liz Truss’ government.

The IMF’s qualms are that the tax cuts will foster inequality, actually, undermine the BoE’s attempts to combat the bloating inflation issue, and do little to aid people in the ongoing cost-of-living emergency.

In essence, the IMF believes that measures to stabilize the UK economy (and its wider financial influence) would be best served by more targeted adjustments aimed at the needy rather than broad slices to tax rates that many believe will mostly benefit the rich. The IMF itself has continuously warned countries and regions that only the poorest need be protected from rising inflation and energy bills, in order to limit the impact on public debt.

Further Complexities

Faisal Islam – the Economics Editor at the BBC – has asked the question of whether or not the UK is at peak inflation (mid-September). He suggests that this would have been a ridiculous idea before the Energy Price Guarantee was announced, but that singular measure could reduce inflation by between four and six percent (‘headline’ inflation).

He goes on to mention how this is muddied by the fact that other commodity prices are continuing to surge, such as food and cites foodstuffs such as eggs, cheese, and milk. Equally, he goes on to say that inflation in the services sector – covering large swathes of the UK economy – is also on the increase.

In reality, the expectation is that UK inflation is either in depression or is entering one and that it will rise again soon, alongside energy bills.

Those Houses Again

At the end of July, the Office of National Statistics (the ONS) reported that house prices in the UK had risen by their biggest yearly increase in the last 19 years. It is thought the increase has been a response to the holiday on stamp duty of last year.

In England and Northern Ireland, the duty was reduced and then phased out by October 2021. In tandem, property tax in Wales ended in June last year as well as an equivalent one in Scotland before that in March.

The responses were ones taken as the world emerged from the coronavirus pandemic and its economic fallout. It may be argued then that differences seen this year in the data are a result of the unprecedented turmoil in the marketplace that was happening last year.


Once again as this article has been written, the BoE introduced emergency measures (reported on by the Evening Standard) to protect the financial stability of Britain in the wake of Kwasi Kwarteng’s ‘mini budget’. In light of the falling value of the pound internationally, the BoE has indicated it will buy back billions of pounds of government debt in order to drive down interest rates on public borrowing.

In the face of this, it is hoped that inflation too will stabilize at a low position but concerns remain as to what is about to unfold economically in the coming months.

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