Financial markets/economy

Why the UK's Inflation Rate Has Surged

Posted by MoneyController on 05.02.2021

As 2021 starts to unfold, people across the UK are beginning to see a general increase in prices. The cost of living has risen since last December following Brexit and the all the additional regulations and taxes. On top of this, increasing global demand for goods has exceeded supply, particularly over the last 2 years. This situation has been amplified by waves of pandemic lockdowns and travel restrictions.

Last minute demand for Christmas gifts

Despite having indications of discontinued discounting, the price of clothing has put pressure on inflation. What’s more, increased holiday demand for items such as computer games and children's toys has also nudged up inflation rates. And since August, annual recreation and culture inflation has reached its peak, according to some reports.

Petrol prices inch higher

Following Boris Johnson’s Christmas travel ban, fewer people were travelling for the holidays, but increased demand for goods put pressure on transport costs. Costs for transportation including air, sea and coach fares, as well as petrol prices rose during the holidays. That said, falling food prices did help offset the increased transport costs. Petrol prices have risen 1.5p over the past month as the price of oil has continued its ascent. According to reports, this trend can be expected to continue upwards if we see an economic recovery this year.

Post pandemic inflation

While inflation appears to be reasonably contained for now, once social restrictions are fully lifted, there are worries of an unprecedented surge in in consumer demand, and consequently, prices. The Bank of England is equipped to deal with inflation, as it could raise interest rates from their current historic lows, but this will only be done when the economy is stable enough absorb a rate hike. Laith Khalaf, financial analyst at AJ Bell stated that, “If inflation does take hold, the Bank of England has plenty of ammunition to throw at the problem by raising interest rates from historic lows. The issue is the Bank won’t want to tighten policy until the economy is able to withstand it.”

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