As inflation continues to rise unemployment also rises, together with the economic pressures stemming from the Covid-19 pandemic. Following UK’s exit from the EU, the Central Bank of England’s chief economist predicted a jump in inflation for the country and a catastrophic economic situation next year. He believes that the long-term impact of Covid-19 on the economy will continue. Britain struggled to lift Covid-19 restrictions, but its economy now faces a range of problems, from disruptions in supply chains and rising inflation to the risk of increasing unemployment. These problems have made it difficult for British policymakers to steer the economy.
The Probability of Inflation Reaching 5%
Huw Pill, who took office at the Bank of England last September, succeeding Andy Haldane, has predicted that inflation would reach 5% next year. In the meantime, inflation has been exceeding the Central Bank’s forecast for six months, recently reaching 3.1%. The Bank of England had forecast a 2% inflation for this year. Earlier, Andy Haldane’s predecessor had warned that given the current state of the economy, inflation could reach 4% with interbank interest rates also rising. These predictions, therefore, indicate that a catastrophic economic situation in the UK is quite possible and the long-term impact of Covid-19 on the economy will continue to take on new dimensions.
Rise in Interbank Interest Rates
Unprecedented in British history, interest rates have fallen to 0.1% since early 2020 to reduce the economic impact of Covid-19. Experts predict that this rate will increase at the next meeting of the Monetary Policy Committee (MPC).
Rising Inflation After the Fuel Crisis
The disastrous state of the British economy is taking on new dimensions every day and the long-term impact of Covid-19 on the economy is now emerging. Inflation has risen in recent months due to rising fuel prices, which have reached a nine-year high, a shortage of truck drivers and disruptions in the distribution of goods. “I would not be shocked—let’s put it that way—if we see an inflation print close to or above five per cent [in the months ahead]. And that’s a very uncomfortable place for a central bank with an inflation target of two per cent to be,” Huw Pill told the Financial Times. This is not very promising for the central bank, which has set the inflation rate at 2%. The Bank of England official predicted that interest rates would return to pre-Covid-19 levels (0.75%) at the November 4 meeting. He said members of the Central Bank’s monetary policy committee saw no reason to continue the emergency policy, given the easing of corporate restrictions in the country.
Rising Inflation in the UK
According to Andy Haldane, former chief economist at the Bank of England, the country is in a period of volatile inflation and low development. The catastrophic economic situation in the UK will happen shortly. Inflation in the UK reached 3.2% in August, the highest level in a decade. The Bank of England forecasts that inflation in this country will rise to more than 4%, which is twice the target set for the British economy.
Slowing Economic Growth
While the British economy overgrew after the lifting of Covid-19 quarantines, the latest figures show that the pace of economic growth has slowed sharply and the economy is now in a catastrophic state. Official statistics show that the economic growth slowed sharply in July, and the same trend continued in the second half of this year.
Supply Chain Problems
Economic difficulties in the UK have also led to supply chain complications. British manufacturers have faced delays in supplying raw materials, while all this happened prior to people rushing to petrol stations to panic-buy due to a shortage of tanker drivers. The lack of manpower in the UK, which is also seen in other economies in the world, has worsened since the country decided to leave the EU and end the free movement of workers from the union.
Declining Consumer Confidence Index
The dire economic situation has also hurt consumers. Disruptions in the supply chain and rising inflation have lowered the consumer confidence index in the country. British families have also faced tax increases and reductions in government benefits. Data from the Bank of England in recent days shows that consumers have once again turned to saving rather than spending.
Problems with Employment and Wages
Britain’s unemployment rate had been falling over the past few months due to the country’s improved economy and government support programme. But the bailout ended at the end of September, and now the Bank of England is worried about rising unemployment again. Wages have increased, but rising inflation has affected the people’s spending power.
UK’s Highest Inflation Rate in Nine Years
The latest report from the Office for National Statistics shows that inflation in August reached its highest level in nine years. The ONS said the Consumer Price Index (CPI) rose to 3.2% in August, up 1.2 percentage points from the previous month, the highest increase since 2012. Rising prices for food, fuel and second-hand cars are among the factors contributing to rising inflation.
Rising Prices for Fuel and Used Cars
The price of used cars has increased by 18% in 4 months. In the past, prices always dropped in late summer due to the arrival of new cars. The Covid-19 crisis and the lack of car production have led people to buy second-hand cars. Fuel prices also rose sharply last August, according to the report. The average was 134.6 pence per litre of petrol, increasing by 21.5 pence compared to August last year.
Inflation is Higher than Expected
The Bank of England had forecast an inflation rate of 2% for this year. But this is the fourth month in a row that inflation has exceeded the Central Bank’s forecast. Jonathan Athow, the deputy national statistician at the ONS, said: “August saw the most significant rise in annual inflation month-on-month since introducing the series almost a quarter of a century ago. He predicted, however, that the situation was temporary and unlikely to escalate. The Bank of England predicts that inflation is in a state of transition.
The economic situation in the UK due to Covid-19 and London’s withdrawal from the EU is not well-defined. Although all European countries are in a financial crisis because of the pandemic, statistics and polls show that the UK is in the worst position in all respects compared to all OECD countries. Earlier, the National Bureau of Statistics reported that the UK economy had suffered the most extensive annual loss in nearly three centuries last year, with a 9.9% drop due to restrictions created by the pandemic. It seems that the long-term impact of Covid-19 on the UK economy will remain for several years because, in addition to the outbreak, the country also left the EU and this has caused more of a problem in addition to what other countries are suffering because of the pandemic.
