Inflation Frenzy: The What, Who and Why of the Inflation Discussion
A. Back to Basics
Let’s start with some ECON101 basics:
- What is inflation?
Inflation occurs when there is a sustained increase in the general level of prices
- Which authority is repsonsible for monitoring inflation?
The Bank of England is responsible for keeping the inflation rate within target
- What is the target for inflation set by the Bank of England?
The target for inflation is 2% (±1%)
- What is the current level of inflation in the UK?
The current level of inflation in the UK, as of January 2022, stands at 5.1%!
- Why is inflation bad?
People on fixed incomes are unable to buy as many goods and services as they did before. The uncertainty caused by inflation leads to less investment within the economy as businesses may be reluctant to invest when they cannot predict future sales and profits with confidence, affecting the unemployment rate, economic growth, and the balance of payments. Finally, given that interests rates tend to go up during inflationary periods, this can lead to a spiral in which household debt and mortgages become unaffordable to repay (particularly as many of these are on flexible interest rates)
- Can inflation be good?
Inflation is not an inherently ‘bad’ economic outcome; the circumstances in which inflation arises are also important in evaluating whether it indicates healthy macroeconomic conditions or not. For example, increased inflation following an economic crisis is an indication that spending in the economy is empowered, consumer and business confidence for the trajectory of the economy increases, and expectations about the future reinforce further spending. Hence, in this scenario, the higher price level underlines an economy which enters its recovery phase (good!). Furthermore, and as with most economic phenomena, classifying inflation as good or bad depends on the perspective of each economic agent. For example, tangible assets, like real estate and commodities, have historically been seen as inflation hedges. Real estate owners benefit during inflationary periods not only because rising prices increase the resale value of their property, but also because this generates higher rental income as the value of the property rises with inflation
- What causes inflation?
There are 3 main theoretical causes for inflation: demand-pull inflation, cost-push inflation and the interaction of both demand-pull and cost-push inflation. In layman's terms, demand-pull inflation is a result of excessive increases in the demand-side of the economy, potentially through increased consumer spending, increased investment activity, increased fiscal spending by the government, a boom in the export market or a combination of any of these factors. On the other hand, cost-push inflation is caused, as the name suggests, by rising costs in the supply-side of the economy. These include increases in wages and salaries, increases in import prices, increases in profit targets by corporations, and increases in indirect factors (e.g.: indirect taxation like VAT).
B. What is driving inflation in the UK?
This debate is far too long to analyse in detail and a consensus is far from being reached amongst prominent economists, the chancellor’s office, and the public’s perception. In general, below is a list of factors that are being discussed as potential primary reasons for the increased price level:
Businesses are struggling to recruit lorry drivers, hospitality, and food industry workers which drives up labour costs and creates supply chain bottlenecks, causing prices to soar. Undoubtably, this is partly due to the pandemic, but is compounded by Brexit, as many of the workers in these sectors were EU nationals who left the UK
Although it is hard to pinpoint the precise totality of the effects of Covid on inflation given how recent the economic shock is, the disruption of global supply chains during lockdown measures to curb the spread of the virus through travel restrictions is a definite contributing factor to the observed increased prices. As Reuter’s reports, the cost of exporting and importing goods has risen sharply, with the Baltic dry index, the shipping industry’s bellwether, which measures the average prices paid for the transport of dry bulk materials across more than 20 routes, has soared to a 10-year high in October 2021
- Energy Costs
Demand for oil and gas is pushing up energy prices worldwide. This means higher bills for households, and for businesses, many of whom will pass on some or all the extra energy costs to their customers in the form of higher prices to maintain their profit margins
- Demand vs. Supply
Once COVID restrictions were eased and the UK reopened its economy, consumers naturally increased their spending. However, many suppliers have had problems building up capacity in order to satisfy demand (partly due to the aforementioned reasons). Furthermore, additional problems for specific industries made matters even worse: for example, unexpected events like flooding slowed down the production of all sorts of electronic goods according to the Bank of England. These blocks in the supply chain have led to market shortages, pushing up prices.
How can TORI help?
TORI can’t solve the problem of inflation (we wish we could, but we can’t). What we can do, however, is to help minimise the impact that inflation has on your organisation. With the focus on minimising costs arising from the general increase in the UK price level, our team of experts can assist your organisation in the following:
- Optimising Operations & Driving Efficiency
In the current economic environment, businesses are being challenged to review cost structures and increase productivity, all whilst making deeper, faster, safer, and automated changes to keep pace with competitors. TORI can improve the efficiency of your business by optimising your infrastructure and service management, advising you on smart sourcing and overseeing the full managed services lifecycle. We can help you increase profitability, achieve competitive advantage by improving cost performance, optimise quality in your change delivery lifecycle and identify further operational efficiencies
- Business Transformation & Change Management
During periods of macroeconomic instability, businesses should try to change and adapt to minimise the impact on their operations and bottom line. At TORI, we have deep expertise in strategic change, a profound understanding of organisational culture and a track record of success. We will engage meaningfully and intelligently across your organisation, using clear definitions and practical, proven approaches that are firmly rooted in organisational psychology to ensure the most optimal levels of engagement for success. Whether you need to do something new, do something different, or something batter, we can design and deliver a process that helps you to achieve your strategic imperatives
- Cost Optimisation
Faced with the current rate of inflation, it is more critical than ever that your organisation identifies areas for cost savings, while at the same time ensuring that these measures do not affect the overall quality of deliverables to your clients. Our team of high-calibre experts, with many years of experience working with Tier 1 banks, Global Insurance providers and other FS organisations, can deliver tangible reductions in operational costs, licensing costs and general overheads.