The coronavirus pandemic has brought about a lot of uncertainty in many aspects of life, not least the economic uncertainty on a global scale.
Though we’ve hopefully seen the back of the height of the pandemic, whereby the US were recording over 800,000 cases on a daily basis in mid-January 2022, the recent spikes in the inflation rate in both the US and UK have unfortunately prolonged the economic uncertainty.
The UK’s inflation rate was reported to have risen to a 30-year high of 5.5%, with the US rate rising even higher, to a whopping 7.5%, a high not reached since 1982.
Why is the Inflation Rate going up?
One of the main tasks that the Federal Reserve in the US and the Bank of England in the UK are responsible for is controlling the rate of inflation in their respective countries.
Increased demand for goods as countries reopen.
Rising inflation has been driven by supply chain disruptions and pent-up consumer demand for goods following the reopening of the economy as the lockdown restrictions have been easing.
According to the Bureau of Labor Statistics (BLS), the high rate of inflation in January was driven by big gains in food, electricity and shelter.
Rising global energy prices.
In the UK, however, the rise in the inflation rate is largely being attributed to global energy prices, which have been rising sharply in recent months. This is partly because OPEC has been restricting global oil supply and the UK has a shortage of gas and is therefore having to buy more in from Europe and Russia. That’s pushing the price of energy bills at home up. As world travel opens back up, there’s also been a rise in demand for fuel.
International supply chain issues caused by the pandemic have meant shipping containers are in the wrong place, and that’s putting pressure on demand which is pushing up prices. That’s partly where the rise in the price of food, drinks and clothes is coming from.
How does the Inflation Rate affect you?
Inflation is the rate at which prices are rising. If the price of a bottle of milk is $1 and it rises by 5¢, then milk inflation is 5%. In the 12 months to January, prices in the UK rose by 5.5% on average, and the Bank of England has warned inflation could rise above 7% this year.
You may not notice price rises from month to month. But right now, prices are rising so quickly that average pay is not keeping up – and it does not help that some employees request financial assistance on top.
Once that is taken into account, regular pay – which excludes bonuses – fell 0.8% in real terms.
However, there are workers in a few sectors – such as lorry drivers – who are in high demand, and whose wages are rising faster than prices.
Moreover, in April, the lowest-paid will see the UK’s National Living Wage rise by 6.6% to £9.50 an hour, which is higher than the current inflation rate.
However, in the US, while wage rates are still rising, they’re growing at a lower rate than prices overall. Inflation-adjusted earnings dropped 1.7% compared to this time last year, meaning that the typical worker has less buying power now than a year ago.
Some economists have pointed to the fact that measurements of longer term inflation, such as the 10-year breakeven rate, show prices will moderate back to more normal levels due to the Fed hiking rates to get prices more under control but unfortunately, that does little to aid struggling Americans.
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