What high inflation means
Buckle in. I don’t think inflation is going to stop rising anytime soon.
As the ONS announced this week that the UK’s 12-month inflation rate to December 2021 reached 5.4%, it was discussed everywhere how this was a 30-year high. Whilst this is correct, what seems peculiar to me is that the news outlets seemed surprised.
Since the start of the pandemic in 2020, the Government has footed a bill of over £372 billion in order to keep the economy afloat. This includes the cost of the Furlough Scheme, Eat Out To Help Out, and countless Government grants (of which £4.3 billion in fraudulent claims have been written off by the way).
This incredible amount of public spending saw a huge influx of cash into society throughout the pandemic. Whilst millions were reliant on this income to survive, many did not require this income and fraudulently claimed Government support which resulted in taxpayer money being sent to those who did not need it.
Whilst The Bank of England has not updated its Quantitive Easing policy, since November 2020, we can see that between March and November 2020 over £250 billion of additional cash was pumped into the economy. This is the equivalent to 28% of the total cash created via Quantitive Easing in the UK.
This suggests that they purchased Government bonds in order to enable the Government to fund these Covid packages.
Whilst this is great and allowed the UK to stay afloat during a worldwide pandemic (or close enough) it is cause for concern which could have been predicted.
When cash is created, it increases the supply which means that there is more cash within the economy. That results in the new value of the pound being lower than a pound before the cash creation.
Imagine you had a pizza with only 4 slices. If there were 4 of you sharing the pizza each slice would be worth the same amount and you would value the slices equally. Now if another slice got added to the plate, you would value each slice less because there is a fifth one that you can all share.
Whilst it isn’t the best example, it shows how currencies devalue over time. The British Pound has devalued due to increased money supplies, supply-chain issues, and many other contributing factors.
So we can see why inflation has occurred, but what does high inflation mean for the general public?
Unfortunately, it will impact those on lower incomes the most. As prices rise to meet the new demand level set by the public, an average rise in cost is gauged by looking at a basket of goods that a typical household would purchase.
Assuming that everything had increased by 5.4% over the last year (which it hasn’t, but many items have exceeded this), it is those living payday-to-payday who get hit. A 5% increase in costs to someone with £10,000s in the bank is not much of a blow. However, to someone who is counting every single penny to ensure their family stays alive, a 5% increase can be catastrophic.
In order to keep up with rising costs, an extra 5% of income may be required. Unfortunately, that isn’t how the world works though as those who need pay rises to survive are often the last to receive them due to being seen as commodities by their employers who will offer them a 2% raise and think that they are doing them a massive favour.
Inflation is really just another tax on the poor, and it should be painted as such. The only way to beat inflation currently is to begin investing. For those who are living close to the breadline, saving may not even be an option let alone investing. So millions have to make tough decisions about what expenses are the most important.
For those of us who are lucky enough to be in a position to put money away for investments; if you aren’t investing already I would highly recommend reading our free guide on investing to understand whether you should be! Check it out here.
As always, I am keen to hear your thoughts so please drop me a DM on Instagram!
Thomas,
The Bank Engine
Sources:
https://www.bankofengland.co.uk/monetary-policy/quantitative-easing