How would inflation further affect sectors? 5 pointers to note

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How would inflation further affect sectors? 5 pointers to note

 How would inflation further affect sectors? 5 pointers to note
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Highlights 

  • The UK’s inflation rate surged unexpectedly to 5.4% in December up from November’s 5.1%.
  • The rising global prices of energy, supply chain crisis, and higher shipping costs have driven the energy, raw material, and transport bills for business, which are then passed on to the customers.
  • The Consumer Price Index, including owner occupier’s housing costs (CPIH), increased by 4.8% in 2021, the highest since September 2008.

The inflation rate of the UK surged unexpectedly to 5.4% in December up from November’s 5.1%, since its highest in 1992, enhancing pressure on the household sector and on the Bank of England to raise interest rate again. The sharp rise in inflation is driven largely by rising fuel and energy costs and supply chain crises further pushing up the cost, according to ONS.

The Bank of England raised interest rates from 0.1% to 0.25% in December to lift borrowing costs from their pre-pandemic lows and has forecasted inflation to hit 6% in April 2022, while some analysts are expecting inflation to hit 7%.

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At this rate, the prices are rising sharply the average pay of the household sector, which is not enough to keep up. On a monthly basis, consumer prices rose by 0.5%, higher than the expectation of economists for 0.3%.

The Retail Price Index (RIT) hit 7.5% in December, its highest level since March 1991, up from 7.1% in November. The food and drink prices rose by 4.2% and clothing prices by 4.2% year on year in December.  

According to ONS, the annual wage growth in December stood at 3.8%, indicating that employees are facing real-term pay decline and the Consumer Price Index including owner occupier’s housing costs (CPIH) increased by 4.8% in 2021, the highest since September 2008.

Also Read: Report: World’s richest got richer during pandemic

Effect on other sectors

  • Higher Interest Rates

The Bank of England usually raises inflation to tackle the rising inflation, which means the monthly payments on borrowing will go up, especially on the loans tied to the Bank of England’s rates. The high-interest rate makes borrowing expensive for households and businesses, which reduces economic growth and may lead to a recession.

But if the cause of rising inflation is other external factors such as increasing energy and fuel prices, then rising interest rates may not help. So, the government may choose to offer support to households and businesses by reducing taxes on items whose prices are rising sharply.

  • Increase cost of raw materials

The rising global inflation has led to higher energy prices, supply chain crises and higher shipping costs, which has driven the energy, raw material, and transport bills for business, which are then passed on to the customers. Further, the staff shortage in the UK due to Brexit and pandemic has encouraged employers to raise wages. 

  • Stock Market Investment

The rising inflation lowers the value of money, which reduces the capacity of investment to appreciate even if the stock market continues to rise. Similarly, the dividend earned can buy far less than it could have. Inflation increases the cost of living, leaving investors with lesser to invest in the stock market. Inflation increases cost for businesses which in turn affects their margin which then impacts their share prices and dividend payouts.

The rising inflation lowers the value of money

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  • Economic Slowdown

As the rising inflation increases the costs for businesses, which is then passed to end customers, adding to the upward price spiral, which could further affect the demand. So, if the demand is less the supply will be less affecting the overall economy and businesses.

  • Import and export

High inflation rate influences the exchange rate, leading to higher interest rates and a weaker currency. As currency with higher inflation depreciates against a currency with lower inflation.

Also Read: How can the government support the Omicron-affected sectors?

Effect on households

With the rising pressure of increasing cost of living it’s important to be careful that it don’t push households into overspending. So, regular checking on your bills and budget is a good place to start.

Households may also review their saving accounts, which are offering the best possible returns to beat the rising cost of living and may consider investing in stock market for long term as it gives much better chance of exceed inflation than they would in saving accounts.

Also Read: Will Brexit continue to bother UK businesses in 2022?

In the UK, there are over two million pensioners having low-income and are living in poverty. It’s clearly hard for them to cut on their spendings for essential items, with state pension at 3.1% which is far lower to even cover the increasing cost of living. The imbalance is expected to rise further by April, by then the government should intervene to support the household. 

Effect on other sectors

·                    Higher Interest Rates

The Bank of England usually raises interest rates to tackle the rising inflation, which means the monthly payments on borrowing will go up, especially on the loans tied to the Bank of England’s rates. The high-interest rate makes borrowing expensive for households and businesses, which reduces economic growth and may lead to a recession.

But if the cause of rising inflation is other external factors such as increasing energy and fuel prices, then rising interest rates may not help. So, the government may choose to offer support to households and businesses by reducing taxes on items whose prices are rising sharply.

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