Over the past few weeks, inflation has been a hot topic in the news. On 15th December 2021 the media was full of reports, and commentary concerning inflation hitting a ten-year high of 5.1%. One of our local IFAs, George Rashbrook was invited by Wave105, a key regional broadcaster to offer insight into the subject of inflation, and what it means.
In this short guide, we cover the following three key questions:
- What is inflation?
- What causes inflation?
- How is inflation measured?
If you prefer to watch rather than read, here’s a recent video George has published on the definition of inflation and what causes it.
What is inflation?
Inflation is the reduction of purchasing power of a currency over time. When inflation occurs, the cost of goods and services increases. The money in your bank is worth less than it was before. Every pound you have buys you less.
What causes inflation?
The root of inflation can be due to an increase in the money supply. The technical term of this is Quantitative Easing.
Furthermore, inflation can be caused by issues pertaining to supply and demand. This is evident in what is happening with inflation in the UK.
The current causes of inflation in the UK in 2021 are:
- Demand for oil and gas is pushing up energy prices worldwide. This means higher bills for householders, and for businesses, many of whom will pass on some or all of the extra energy costs to their customers
- Shortages of many goods, including building materials and computer chips, are causing supply problems and pushing up prices
- Government support to businesses during the pandemic – like reduced VAT for hospitality – has ended
How is inflation measured?
In the UK there are three key measures of inflation and prices. These include:
- Consumer price inflation
- Producer price inflation
- The House Price Index
Interested in delving deeper into the data? Visit the Office of National Statistics section of their website dedicated to inflation and the indices used to measure changes in prices.
Concerned about inflation?
As Margaret Thatcher once said, “inflation is the parent of unemployment and the unseen robber of those who have saved.”