Warning bells rang in many people’s minds on hearing that inflation had risen to its highest level for more than three years – the major culprits being identified as global price pressures and the weakness of the pound.
Those who have lived through turbulent times or are well versed in economics know inflation can be a self-perpetuating problem – spiralling upwards as prices rise and people demand higher wages (or threaten to strike to get them), as household budgets are squeezed. Employers then have to put the price of goods up to meet increasing wage bills and so it goes on. Weakness in the pound adds to some employers costs for importing materials, and although it can boost exports by making them cheaper, it can also hit exporting companies revenues.
Once the inflation “genie” is out of the bottle it can be very difficult to control.
The fact is that we have lived with low inflation for years, in an era of fiscal austerity which now seems a long time ago.
Currently, if inflation rises above 2 per cent, the governor of the Bank of England has to write a letter to the Prime Minister with a good explanation of why it has risen so high.
It looks like the governor is at risk of writer’s cramp as we face the possibility of inflation reaching 3 per cent or even higher.
It is not just a homegrown problem – inflation is also on the rise in a host of countries including the United States and in many across the eurozone, with higher energy and food prices hitting consumers.
But this latest hike comes at a time when the UK is experiencing a tectonic shift in the political landscape,with Brexit delivering the biggest structural change in decades.
The question now is what can we do about rising inflation? What levers can we pull to mitigate the situation?
The first point to bear in mind is that the decision to leave the European Union has been made and that the major changes which Brexit will bring are still around two years away.
So although the pound has been re-set after the referendum, the chances are the result of the Brexit negotiations will see a further shift in sterling – and the trade deals which will also have a huge impact are even further away. The reality is we are going to have to face is that our pay packets will buy us less,
But for those who need to spend – whether it is on a car to get to work, necessary home improvements or even a well-deserved holiday – the temptation will be to put it on credit cards again.
Consumption rarely slows down, meaning that credit cards add to the problem and quickly plunging the unwary into a messy debt crisis which can be difficult to get out of.
There are no “quick fixes” for economies – the problem is a far bigger story than just piecemeal reform, although we need to put energy in to building exports.
But what is certain is that inflationary pressures are unlikely to ease in the near future. In fact they are almost certainly going to get worse.