Inflation in the UK
The latest report on inflation in the UK shows the lowest figures. Since 2016, the economy has been falling out. Moreover, the records of inflation further lowered with the lockdown due to Covid-19(Lombardelli, Clare, and Jumana 9). Inflation refers to a quantitative measure of the rate at which average prices of products increase over time. It also refers to the general increase in price level where a unit of currency buys less than it did previously. Inflation influences the purchasing power of a nation’s currency. For example, if the inflation rate for petrol is 2% in a year, then drivers will spend 2% more on gasoline than they did in the previous year (BBC News, 2020). The purchasing power of individuals will get affected in case wages do not rise with inflation. Therefore, it results in a fall in the standard of living.
As prices increase, a single unit of the nation’s currency losses values as it will purchase fewer items (Lombardelli, Clare, and Jumana5). That implies that it results in a decline in the cost of living of the citizens in the country. That is because it results in a loss of purchasing power. Ultimately it causes deceleration in economic growth. However, a little inflation encourages people to purchase products sooner and makes it easier for corporates to increase wages. That is why most central banks put up an inflation target of between 2% and 2.5%(BBC News, 2020).
Lombardelli, Clare, and JumanaSaleheen(7) confirmed that the inflation target put up by the Bank of England is 2%. However, by May 2020, the inflation rate had decreased to 0.5% marking the lowest inflation rate since June 2016 (BBC News, 2020). It resulted from a decline in petrol and diesel prices and lower prices or goods and services.
Different methods are employed in tracking the inflation rate in the UK. Consumer Price Index (CPI) is the measure of the inflation rate. It evaluates the weighted average prices of products used to satisfy primary consumer needs(Lombardelli, Clare, and Jumanan 3). The items include medical care, transport, and food. CPI is calculated by averaging the prices of individual goods based on the relative price of all consumer goods. Change in CPI indicates a change in the cost of living.
The Wholesale Price Index (WPI) is also used to measure the inflation rate. It measures changes in the prices of items before they reach the retail level(Lombardelli, Clare, and Jumanan 7). WPI items often vary from one nation to another. However, the measure of items includes the products at the wholesale or producer level. Another commonly used method in the measure of inflation is the Producer Price Index (PPI). Lombardelli, Clare, and Jumana (4) argue that it measures the change in selling price given by domestic producers of items over time. PPI measures the viewpoint of the seller, while CPI measures the perception of the buyer.
Inflation is a key factor applied by the Bank of England when determining the interest rate it will set. It affects the rate of borrow or saving money. When the Bank of England foresees that inflation will fall below 2%, it will cut interest rates to reduce borrowing costs and increase spending. BBC News, 2020 asserts that the Bank of England reduced the interest rate to 0.1 % as a response to the effects of the Covid-19 pandemic. The step was taken to boost economic performance.