The UK, along with many other countries, has seen a sharp rise in prices recently. We took a look at what causes high inflation.
What Is Inflation?
Inflation is a measure of the rate at which the general level of prices for goods and services rise. And thus subsequently, purchasing power of consumers falls. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
Typical Causes
An increase in demand for goods and services tends to typically cause iInflation to occur. This is in tandem with the demand outpacing the supply of those goods and services. This can be due to factors such as a growing economy or rising wages. An additional factor is an increasing costs of production. Additionally, inflation can be driven by monetary factors such as an increase in the money supply or a decrease in interest rates.
Some Causes More Common Than Others
There are several possible causes of high inflation. Some common causes include an increase in the money supply, a decrease in the supply of goods and services, and an increase in production costs. Additionally, high inflation can sometimes be caused by the government setting prices at levels that are too high, or by political instability or natural disasters that disrupt the economy. Finally, high inflation can sometimes be a sign of a strong economy, as demand for goods and services may be increasing faster than the supply.
What Causes High Inflation? UK Situation
Rising inflation has been attributed to increases in the costs of consumer products, which are supported by high consumer demand and supply chain bottlenecks. The cost of food has also increased significantly during the past 12 months.
Energy expenditures, including rising residential energy tariffs and gasoline prices, are a significant contributor to inflation. Domestic gas prices rose by 129% between October 2021 and October 2022, while domestic electricity costs rose by 66%. Following the start of Russia’s full-scale invasion of Ukraine, gas prices reached record highs and continued to rise for the majority of 2022 due to shortages of Russian supplies. Gas and electricity prices are related and have exhibited comparable trends.
What Causes High Inflation? The Implications
There are repercussions for the global economy as well as the humanitarian, military, and political effects of Russia’s invasion of Ukraine. Higher energy prices are a significant economic impact of the conflict on the UK. Gas prices on foreign markets have been slowly down since the invasion, while oil prices (measured in US dollars) have been declining since June.
Road fuel costs and residential energy costs have soared as a result in the UK. Businesses’ energy costs have gone up and are likely to keep going up. The Energy Bill Relief Scheme’s specifics, a new government initiative to assist businesses, were unveiled on September 21.
