Inflation, the measure of the cost of living, has hit 4.2%. This is driven by the rising cost of food and fuel. Normal times would demand interest rate rises, but these are not normal times.
Traditionally, when the rate of inflation rises, this is driven by consumer demand. Therefore the increase to interest rates reduces demand as borrowers cut back and savers put money aside.
However, the reasons for the current rate of inflation are not normal. The rise is driven by increasing costs, not increasing expenditure.
The pandemic and Brexit have combined to expose significant shortfalls in the UK’s distribution and supply chain network. We have a shortage of HGV drivers and we are facing increased regulatory checks as we ‘take back control’ of our borders. These supply chain issues are increasing costs to businesses.
In addition, our continued reliance on fossil fuels means that we are vulnerable to a market reducing supply and, as a result, the wholesale cost is rising.
The costs faced by businesses are being passed on to the customer, therefore increasing the cost of living and driving inflation.
The customer will likely reduce spending where they can as disposable income falls. However, as food and heating are essentials, spending on these items is unlikely to be affected. Therefore, it is likely that inflation will continue to rise in line with costs.
We therefore need the Government to step in and help to resolve these supply issues.
The short term offer of temporary visas for HGV drivers is a start, but we need a long term solution to this problem. We need cooperation to ensure the transport of goods and services is not disrupted as Brexit border checks are implemented from 2022.
We need to invest in renewable energy sources, reducing our reliance on gas and oil, making us less susceptible to market forces. We should also end the drive for profit from public utilities. These are essential for everyday life and yet privatisation has mandated that priority is given to shareholders. We need to rebalance and put people first, ensuring no one suffers fuel poverty.
If the government fails to act, and the Bank of England pushes ahead with the expected interest rate hike, we may see food banks and cold homes increasing at a similar rate to inflation.