The UK's Battle with Inflation
politics.co.uk
As inflation hits 7%, the highest in 30 years, the UK government has embarked upon some possible routes to curb the rate of inflation. Regarding cost-push inflation, which has been exacerbated from the deficit in global oil supplies, the UK is currently in search of alternatives. Coupled with rising demand-pull inflation, generated from the culmination of consumption spending of the COVID-19 economic support funds and a strong labour market, the Bank of England faces increasing pressure to raise its interest rates. Read on more for the analysis of these potential solutions.
UK’s current inflation rate
In March, UK inflation reached 7% due to soaring price of oil and consumer products. The Bank of England indicated that inflation was on track to increase to 10% later this year. UK households will inevitably have to bear the brunt of this increase as they prepare themselves for the steepest incline in the cost of living since the days of the early 1980s.
Rishi Sunak’s Spring Statement
Rishi Sunak, the Chancellor of Exchequer, has acknowledged this nation-wide worry. He has said he will be “taking action to ease the burdens by providing support worth around £22bn in this financial year, including for the most vulnerable through our household support fund”. This includes a £150 council tax rebate for 80% of households and a £200 discount on fuel bills in October which would still need to be repaid. Even then, there has been many criticism that Sunak’s Spring statement has not gone far enough.
Responding to the fuel crisis
In response to Russia’s invasion of Ukraine, the UK, EU and US announced they are aiming to reduce imports of Russian oil and gas. The US ban on Russian oil and gas is immediate, whilst the UK intends to phase out oil imports by the end of 2022. The EU intends to reduce Russian gas imports by 2/3.
Since Russia is a significant global oil producer and supplier, all three markets have been in search of alterative suppliers to regulate oil prices and replace Russia’s imports. Thus, UK diplomacy has been focussed on Saudi Arabia and the UAE, the two countries best able to ramp up spare production capacity quickly. Saudi Arabia is arguably the leading member of OPEC, producing 1/3 of OPEC’s production. OPEC is a cartel of 13 oil-producing countries that constitutes around 40% of the world’s oil supply and have 80% of the world’s “proven” oil reserves. Evidently, they are a major player in reducing the upcoming oil deficit.
Last month, Prime Minister Boris Johnson visited Saudi Arabia and the UAE to discuss energy security as well as human rights issues. This visit failed in obtaining pledges from the two countries to increase their production. Amin Nasser’s (Saudi Aramco’s president) outlook for oil demand remains uncertain “due to various macro-economic and geopolitical factors”, hinting at the strained US relations between the Biden Administration and the Gulf Arab States. Prior to taking office, President Joe Biden said Saudi Arabia would be treated as a “pariah state” over its human rights record. However, both the UAE and Saudi Arabia has committed to improving energy stability through further development in green technology and trade.
Raising interest rates
Last month, the Bank of England’s Monetary Policy Committee (MPC) raised the Bank Rate for a third time in a row from 0.5% to 0.75% in the hopes of tackling inflation. The MPC has also started to reduce its quantitative easing from its peak value of £895bn. The effectiveness of this raise can be questioned. As always, there is no guarantee high street banks will boost their rates because of a Bank of England rate rise and even if they do, it is unlikely that it will have an immediate effect on inflation. A 0.25% raise may still not be sufficient to incentivise households to save.
by Ke Thie Kiew