Pound value continues to fall as inflation rises

For the first time since January, sterling fell below $1.35 in comparison to the US dollar on Wednesday, extending a drop in a week dominated by supply crisis stories.

The pound has dropped from above $1.37 and images of panic-buying at gas stations have become the newest expression of the UK's supply chain problem, which is centred on a shortage of HGV drivers.

What is ‘Stagflation’?
Stagflation is a term used to describe a period in which an economy has both sluggish growth and excessive inflation.

This can occur when there is slow economic growth and high unemployment, sometimes known as economic stagnation, accompanied by rising prices (i.e. inflation). Stagflation also occurs when the money supply expands but the supply of goods and services is limited.

This particular economic phenomenon is considered bad because slow economic development will almost certainly result in a rise in unemployment, but not in price increases. This is why an increase in unemployment results in a fall in consumer purchasing power, which is why this occurrence is regarded negatively.

Additionally, economists debate on the precise causes. For instance, some argue that high oil prices were a major issue, since they drove up both prices and costs, reducing profit margins. Meanwhile, governments' inept attempts to regulate prices increased inflationary pressure by making it more difficult for production to keep up with demand.

As of now, there is no sure method of completely mitigating the consequences of a stagflation but economists agree that productivity must be raised to the point where higher growth may be achieved without further inflation. This would allow monetary policy to be tightened to control the inflation component of stagflation.

The phrase has resurfaced as a result of supply chain disruption caused by the Covid-19 epidemic, which is pushing up costs. Unemployment, on the other hand, continues to be persistently high.

What is the cause of the current rise in inflation and what is its impact?
Inflation recently reached its highest level in nine years, with the Bank predicting that it will shortly rise beyond 4%, while monthly growth statistics indicated that the economy nearly came to a standstill in July.

New borrowing figures from the Bank of England showed that consumer credit - which includes credit cards, personal loans, and vehicle financing - increased by £351 million in August. The overall level of such loans is 2.4% lower than a year ago, indicating that consumers were wary about exceeding their budgets over the summer.

Meanwhile, according to statistics from the British Retail Consortium (BRC), a more than two-year period of dropping store prices is expected to come to an end in the coming months as inflationary pressures take their toll. 

Higher transportation expenses, labour shortages, Brexit red tape, and commodity price increases are all being passed on to consumers, according to the report. 

Overall, store prices were 0.5% lower this month than last year, while food costs rose 0.1%, the first increase in six months, and other items, such as DIY and gardening supplies, had the greatest level of inflation since 2018.

Hargreaves Lansdown's senior investing and markets analyst, Susannah Streeter, said, "Fears of stagflation are stalking the financial markets with the fuel and wider supply chain crisis threatening to slow recovery as businesses grapple with the ogre of sharply rising prices.”

The rise exceeded City experts' expectations of a 2.9% rise, reflecting a rise in food and drink costs since August 2020, when Rishi Sunak's "Eat Out to Help Out" discount plan cut the cost of restaurant meals. Additionally, the Office of National Statistics (ONS) argue that the largest driver of inflation was a significant drop in the cost of a restaurant meal in August of last year, when "Eat Out to Help Out" provided customers half-priced food and drink Monday through Wednesday.

The rise in inflation also affects the NHS as NHS workers have already had their 3% pay deal with the government wiped out, while other public sector workers will have their buying power slashed even more as salaries are frozen.

Will inflation continue to rise or decrease in the coming years?
Many analysts anticipate that the increase in inflation will be transitory as pricing distortions from last year disappear and pressure on global supply chains eases.

On the contrary, many analysts also fear that the current increase in inflation might remain high as the coronavirus Delta strain, ongoing pandemic limitations, and Brexit continue to put pressure on supply networks.

Any news pertaining to the increase in inflation can be intimidating to all businesses and individuals. We aim to simplify your business needs by providing you remote accounting services. For more information on how the recent rise in inflation can affect your business and customers or for other business queries, please contact Persona Finance at [].
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