The Truth Behind The UK Inflation: Why Prices Are Going Up? – An Analysis by Tax Care Accountants

So What Is Causing The Inflation?

The surge of inflation is forcing families to reevaluate their family spending. The majority of small businesses in the UK are struggling to cope with the rising cost of the expenditure of running the business. Overall the rise in the cost of living in the UK is causing a major threat to the UK’s overall economy that may lead to a recession. UK mass media is blaming the Russia-Ukraine war, however, there are other factors that played a vital role in the surge of the inflation rate in the UK. 

There three main reasons of higher inflation: cost-pull inflation, demand pull inflation and higher economic growth/recovery. 

Cost-pull inflation: cost-pull incurred due the rise of the cost of raw materials or cost of manufacturing. 

Demand-pull inflation: demand-pull inflation incurred due to the higher availability of money and lower interest rate. 

Economic growth/Fiscal Policy Inflation: the growth of overall economy will require higher wages and more consumer spending, higher purchase power parity. 

The following article was drafted based on various theories of price-demand and economy. TaxCare Accountant has not conducted any academic/industrial research to the conclusion. TaxCare Accountants do not take any form of responsibility for any decision made by the readers. 

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Quantitative Easing (Printing Money)- Devaluation of Money

Inflation through devaluation is incurred due to the dramatic demand for the investment or assets through Quantitative Easing.  

Quantitative Easing or printing of money was first introduced in 2008 by the Bank of England to tackle the financial crisis. Quantitative Easing means the injection of money by the central bank into the financial and the economical system during any crisis. Bank of England invested almost £450 billion in the UK financial market since 2020 through Quantitative Easing.  Quantitative Easing helped the UK economy to remain stable during the Covid-19 pandemic as a lot of money was poured onto UK financial market. This has resulted in surplus cash in the hand of a majority of the bankers. When the banks have excessive cash they tend to lend more money to the borrowers at a lower interest rate. When consumers have more money it means they have more demand. More demand requires more supply. Lack of supply during the lockdown led to higher prices according to the principle of “Price-demand Elasticity” theory. 

Demand-pull Inflation- lowering of Interest Rate to save the economy

0n 17th March 2020 Bank of England cut the interest rate to 0.1% which is the lowest in UK history. They remained at this level until December 2021. According to the “Modern Theory of Interest”, demand-pull inflation will be surged due to the availability of the capital at a lower cost.  

Household savings during the lockdown

According to ONS database, weekly household spending fell by more than £100 on average during the coronavirus pandemic.  Overall household savings was around £5,200 in a year. Higher savings led to higher demand as well as higher spending by the consumers in the UK. Higher demand pushed the prices up when the economy started to opening up during the post lockdown period.  

Cost-Push Inflation- Higher Energy Price

Millions of people in the UK saw an unprecedented £700-a-year increase in energy costs last month.   Fuel price has increased to almost 200.0 p in June 2022 versus 125.5p a year earlier. Although the UK does not import more than 10% of its oil/gas from Russia, however, the Russian-Ukraine war is contributing to increasing in the energy price globally. UK Government offered supporting measures to control the energy price. However, it did not help to stabilise the cost. 

Cost-push Inflation- Raw Materials

The cost of raw materials is rising globally. As the UK is a major exporter of raw materials and foods. Furthermore, the cost of transportation has increased due to the higher fuel price. Brexit red tapes across the borders is also causing the rise of high inflation.  

How to deal with inflation?

Inflation is good for the economy if the economy is growing. However, the economic growth may not be stable if the wages growth does not match the inflation growth rate. At the moment the wages growth rate is 4.2% whereas the inflation is almost 11%. 

So how do we deal with inflation? If you are a business owner, you can focus on saving costs and restructuring your business. The following methods can help you to reduce the cost of your business: 

Outsourcing Low Strategic Importance:  Importance With Low Process Complexity And Dynamics.

These type of activities can be outsourced because neither it will impact the business objectives materially nor they require expertise and frequent and immediate change.  Or

These activities can be automated as mistakes and errors are not very costly and machines will not need to be adjusted frequently and immediately so that costs we not arise repeatedly. Importance With Low Process Complexity And Dynamics.

These type of activities can be outsourced because neither it will impact the business objectives materially nor they are require expertise and frequent and immediately change.  Or

These are activities repetitive in nature example Security, cleaning and maintenance, canteen etc

Automation to save your cost: activities like packaging and branding of goods may be of such nature to most businesses.
These activities can be automated provided resources are available.
These are usually one-off costs at initial installation and subsequently, minor changing costs are incurred.
Operating efficiency, Close control, and consistency are necessary if business objectives are to be achieved.

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