The recent surge in inflation has been attributed to a variety of factors over the last few months, such as the gradual reopening of economies after lockdowns, the transition to an increased demand for goods and services, and the low base which had been established during the pandemic. As the British pound saw sharp declines in value during the same period, imports became more expensive, and combined with the delayed return to usual demand, this has pushed inflation up.
Despite this, it is important to note that the current 3.2% rate is still well below the Bank of England target rate of 2%, meaning that a rise to ‘normal’ levels could be some way off. With global economic uncertainty still rampant, consumer demand being suppressed and the potential for further restrictions being implemented in response to the Covid-19 pandemic, it could be some time before inflation reaches its pre-pandemic levels.
Additionally, costs of some goods and services are likely to remain higher than usual for an extended period. For example, increased hygiene costs and PPE costs are unlikely to disappear, which means that prices of goods such as haircuts, restaurant meals and other services are likely to remain higher than usual.
Finally, we must also consider the potential damage to economic productivity that additional restrictions may have. With the government yet to decide on the easing of restrictions from 4 July, the resulting uncertainty could discourage businesses from investing and hiring, leading to weakened economic output and pressure on wages and prices, leading to further deflation.
In conclusion, while the current 3.2% rate of inflation may seem high, it is still a long way from pre-pandemic levels, and a ‘normal’ price level is still some way off. As there remain a host of economic factors and potential risks to economic productivity, businesses will remain cautious in the coming months and months of economic recovery.
