A large part of the inflation rise that UK is seeing currently has been caused by supply chain disruptions that were caused by Covid lockdowns. This is also getting reflected in high food price inflation that UK has seen in the past one year. Reduction in investments in exploration and production of conventional fuel sources such as oil in the past few years to reduce carbon emissions has reduced supply of conventional fuel. Natural gas is considered to be a cleaner fuel than oil. Over the years UK and other countries have increased the use of natural gas by substituting oil with it. This has resulted in sharp increase in demand for natural gas. Rise in natural gas prices is a major factor that has caused the inflation surge that UK is seeing currently.
The inflation that UK and other countries are seeing is clearly supply-side driven. Increasing interest rates for controlling supply-side driven inflation will bring down demand. A more effective and sustainable strategy for controlling inflation driven by supply-side factors is to take steps for increasing supply. Decreasing demand to bring it in tandem with supply will cause severe economic slowdowns. UK and the world need to ensure that supply chain disruptions such as the one caused by Covid lockdowns do not happen again. They also need to find a way out where more reliance on cleaner sources of energy does not result in power shortage and inflation in energy prices.
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