UK inflation is expected to soar, as household bills such as energy prices have soared, as the country faces a cost-of-living crisis. The Bank of England attributes the continuing inflation to the sequence of shocks over the past few years. These factors are compounded by persistent effects of the Covid pandemic and by the ongoing war in Ukraine. These cumulative factors have had a tremendous impact on the affordability of basic needs. Together, these two measures present a more complete picture of our economy’s status.
Inflation measures how the price of a basket of goods increases, or decreases, over time. This is invaluable for economists and consumers to understand how the cost of living is evolving. Like the Federal Reserve, the Bank of England releases inflation data every month. Combined with other key economic indicators, this can be a great sign of economic growth. For instance, if the price of a bottle of milk rises from £1 to £1.05 over a year, this represents an annual inflation rate of 5%.
The Covid pandemic was a major factor in driving prices up in all areas and industries. Disruptions to global supply chains, coupled with a spike in demand for goods, led to a rapid and massive increase in costs. Households, meanwhile, were hit with ballooning costs while they endured quarantines and an evolving labor market and economy.
Further, the war in Ukraine has made inflationary pressures even worse. The ongoing conflict has driven up prices for gas and food, both big portions of consumer spending. With rising energy costs, the squeeze on household budgets is deepening, raising new questions about economic security.
In this sense, inflation is so much more, because it becomes one of those key indicators that tell you how successful or unsuccessful an economy is being run. As inflation rises, consumers’ purchasing power goes down, making it harder for American families to keep up with the cost of living. These monthly inflation reports are extremely important to policymakers and economists. These observations inform the decisions that drive the debates over fiscal and monetary policy, too.