Inflation Infection: UK Sees Surging Levels of Inflation​


By Curtley Bale​

The Story

Late last week, the Bank of England sought to play down concerns about the UK’s rising inflation. The central bank believes the peak in inflation, expected to touch 3% in the coming months, is due to the strong bounce-back of the UK economy.

Inflation refers to the general increase in prices over time. It also reduces the value of money; when prices increase, the amount you can buy with the same amount of money falls.

The Bank of England's lack of concern is due to the belief that the current inflation boom is “transitory”, as the economy opens up again and the demand for goods and services rises sharply compared to the spending levels experienced during the lockdown period (BofE).

What It Means For Businesses and Law Firms

The central bank uses monetary policy (using tools such as interest rates and quantitative easing) to influence the supply of money in the economy and the cost of borrowing.

The UK’s interest rates have been at record lows since the financial crisis, reaching their lowest of 0.1% since March 2020. In theory, low interest rates stimulate the economy by making the cost of borrowing cheaper. This encourages borrowing, investments and consumer demand, which has a knock-on effect on the economy as people and businesses spend more money which causes the economy to grow. However, as borrowing and spending increase, the increased demand can result in rising inflation. This explains the relationship between the UK’s low interest rate and the inflation peak that the Bank of England predicts.

The UK, alongside many other countries, have been stimulating the economy to help the recovery from the pandemic. However, the government loan schemes, furlough and asset purchasing schemes are all contributing factors to the surge in inflation.

The Bank’s Monetary Policy Committee (MPC) has decided to leave interest rates unchanged and to let the inflation subside on its own rather than take action. Whilst some of the Bank’s MPC members are questioning the extent to which these measures are continued, a judgement call is being made to support the post-pandemic recovery (Bloomberg).

Providing the inflation rise is only temporary, there will be no long-term action by the Bank of England. If inflation continues to spiral, however, the central bank may raise interest rates to help reign the economy back in.