This case study analyzes an article on inflation in the United Kingdom. The reviewed work describes the rise of the statistic shortly before the article’s writing and the potential reasons. It adds that the increased growth rate may be temporary, and the predictions and resulting reactions from the Bank of England may be overly pessimistic. The article supports the latter opinion with a claim that many private economists disagree with the Bank’s forecast and finishes the piece with a description of the oil pressure on manufacturers and consumers.
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The Inflation Increase
The rate of inflation in the UK had been stable before July. According to Schomberg and Bruce (2018), in July price inflation rose at an annual rate of 2.5%, which was higher than that of the three prior months, which held at 2.4%. The new figure was consistent with the predictions of analysts who were polled by Reuters earlier. The increase represented the first time since November when inflation in the United Kingdom rose, according to the article. Increases in inflation result in decreased purchasing power for consumers, which adversely influences the economy.
Earnings and Spending Power
Inflation is mostly unavoidable in most modern economies, and its adverse effects are usually avoided through corresponding, preferably higher, increases in consumer earnings. If one’s income rises faster than inflation does, he or she ultimately will have more spending power despite the increasing prices. However, according to Schomberg and Bruce (2018), average earnings (including bonuses), had been rising at 2.4% in June and before it and did not display growth in July. Not only does this figure fail to match the increase in inflation, but it is also still below the pay rise levels achieved before the financial crisis. Furthermore, this trend is described as long-running, which means that the United Kingdom is still recovering from the recession and should be especially mindful of inflation and the spending power of its citizens.
Future Inflation Projections
The Bank of England raised its interest rates in response to the inflation increase and forecast inflation to reach a value just above two percent in two years. According to Schomberg and Bruce (2018), Reuters and The National Institute for Economic and Social Research disagreed with the estimate. While the former did not provide a specific forecast for the figure the agency expects to see or the time frame, the latter stated that inflation would reach the Bank of England’s target of two percent within a year of the article’s publication. Furthermore, many private economists disagreed with the Bank, claiming that inflation was weaker than predicted and would fall earlier.
Reasons for the Increase
Economists objected to the idea that the inflation increase is permanent due to the factors they perceived as the driving forces behind the change. Schomberg and Bruce (2018) describe the causes as one-offs, providing examples of rises in videogame prices and transport fares. While transport fares are usually increased on a permanent basis, the changes do not happen often and are designed to avoid long-term interference with the consumers’ spending power. The video game price changes are described in the article as volatile, which is true, as prices for these digital products are highly mutable due to the essentially free nature of copy production and are frequently adjusted based on the game’s age and popularity in addition to various sales and deals.
The report on inflation caused additional adverse effects on the UK economy due to its public nature, which spread the information to news agencies and therefore to consumers. According to Schomberg and Bruce (2018), sterling, which had been in decline before the data’s publication due to factors such as the uncertainty of Brexit and the weak prognosis for rate hikes, fell further after the information was made available.
The article notes that the consumer price index peaked and hit a five-year high at 3.1% in November, and the value was associated with the pound’s weakening after the conclusion of the Brexit vote. The initiative remains controversial and is capable of disrupting the nation’s economy in a significant fashion, and its progress should be monitored for the appearance of economic factors.
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The article names the retail price index as another significant measure of inflation that is used in the UK to set prices. The value is typically higher than that of CPI, which is reflected in Schomberg and Bruce’s (2018) description of its July 3.2% figure as the weakest rise since March 2017. This index tends to be more consistent with price increases by manufacturers, as the July price rises averaged out at 3.1%. In agreement with the index’s state as the weakest in a considerable period, the price hike is lower than June’s 3.3%, though the value is still higher than the one predicted by Reuters.
The primary motivation behind price increases is the rising cost of production. According to Schomberg and Bruce’s (2018), the annual rise in raw material spending for manufacturers constituted 10.9% in July, the most significant figure in over a year. The primary cause was the rise in oil prices, which had grown over 50% higher. The increased production expenses, combined with constant inflation, motivate manufacturers to charge higher prices for their products, transferring the burden of inflation to consumers and reducing their spending power. The article notes that manufacturers may eventually need to find new suppliers or introduce new products and services to stay competitive.
The housing market was described in the article as weak at that moment, which was noted to be a part of the trend it had been experiencing ever since the Brexit vote. The prices of London houses had been falling at an annual rate of 0.7% in June, which was the most significant figure for the value since 2009. However, the prices of houses in the country as a whole had been rising at an annual rate of 3.0%, an increase that was still described as the weakest since 2013. The article identifies another factor in the weakening of house price measures, describing them as having slowed to about half rate.
The article that was studied in this essay describes the July 2018 inflation increase in the United Kingdom. It identifies the growth as higher than that in the prior month but consistent with the agency’s predictions. Furthermore, it correctly claims that the increase was volatile and temporary and that the Bank of England’s response was an overreaction. It goes on to address the reasons for price increases, especially the significant rise in oil prices, as well as the state of the housing market in the UK. Overall, the country was still recovering from the 2008 recession and the Brexit controversy, but the situation appeared to be becoming more stable.
Schomberg, W., & Bruce, A. (2018). UK inflation rises for first time in 2018, seen falling soon. Reuters. Web.