NEWS & VIEWS
This is a guest article written by FSL intern Nikhil Patel, who has spent the week conducting work experience at our office. The following is Nikhil’s original work, representing his research on the UK economy.
The UK’s GDP is projected to increase by 3.6% in 2022 before levelling off in 2023, with inflation set to peak at around 10% exceeding the target of 2%+-1%. Interest rates are similarly set to increase to around 2%, while consumption is set to decrease due to higher prices eating up households’ income.
UK inflation is set to reach a staggering 10% at the end of 2022. This high inflation rate is due to the increased energy and food prices from supply shortages across the world. The main causes of inflation are:
- The current war in Ukraine
- The Covid pandemic
Ukraine is the world’s main exporter of food – as such, the war on Ukraine has restricted food supplies to the UK. This means that food prices will increase, adding to inflation and increasing the cost of living. In addition, 40% of the EU’s oil and gas comes from Russia, and Russia supplies 14% of the world’s gas and oil. So, the war has disrupted the supply of oil and gas – as there is less supply, this will push up the energy prices in the UK.
The covid pandemic resulted in the closure of most businesses and people stayed at home saving money. Also, due to the closure of world economies the supply of most products decreased substantially. When the economy opened back up people had large amounts of money saved up so they increased their spending, however due to the supply shortages, this only lead to inflation.
Secondly, during the pandemic the Bank of England embarked on quantitative easing which pushed down interest rates to 0.25%. This means that the price of mortgages and loans decreased which means that demand for housing increased, pushing up the house prices by 10%. This causes the wealth effect as current homeowners feel wealthier so they will spend even more money. This pushed up prices even further causing inflation.
Output exceeded pre-pandemic levels in 2021. But recent data shows a slowing in the economy. Monthly GDP declined by 0.1% in March 2022 down from 0.7% in January with no growth in February. UK growth is expected to be around 3.6% this year.
In response to the high inflation rates the UK government now has to implement a contractionary monetary policy. The Bank of England has said, “the base interest could reach 2 per cent next year”. This will increase the reward for saving, meaning people will spend less and save more which should reduce inflation.
Nikhil Patel is an A-Level student striving to study Economics at University.