Now Britain's inflation touches 40 year high

18 May 2022 , 02:55 PM

UK’s inflation in April was 9%. This is 40 year high inflation rate that the country has seen. This means that at least since 1982, the country has not seen this high level of inflation. A large part of this increase in inflation is because of inflation in electricity and gas prices.
What is the role of Russia — Ukraine war in causing this rise in inflation? Between 1982 and 2022, UK got directly involved in three major wars. The 1982 Falklands war between UK and Argentina; 1992 Gulf war; and the 2003 invasion of Iraq by US , UK and other allies.  But inflation did not touch the peaks then that it is touching now. So all the inflation rise that UK is seeing now cannot be attributed solely to factors relating to ongoing Ukraine war. Also, inflation had started rising in UK much before the war in Ukraine started.

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.