The UK economy is recovering well as Covid-19 restrictions are lifted, according to the latest GDP figures. However, a looming threat of rising inflation remains. This has worried many economists, who fear a steep rise in inflation could impact economic recovery. Will rising inflation put a stop to the post-lockdown recovery? Read on to find out.
What is inflation?
Inflation is simply a measure of how much the prices of goods (like food or toiletries) and services (like train tickets and beauty treatments) have increased over time.
People usually measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is called the inflation rate.
Inflation is normal and is always there. The problems only start if inflation becomes too high or too low.
If inflation is too high, it can become hard for businesses to set the right prices and for people to plan their spending.
On the other hand, if inflation is too low, then some people may put off spending because they expect prices to fall. Although lower prices may sound like a good thing, if everybody reduced their spending, then companies could fail and unemployment levels could rise steeply.
Central banks – in the UK this is the Bank of England – set inflation targets to try and keep price increases at a manageable level.
How could inflation impact recovery?
So far, post-lockdown recovery has been very strong. The latest GDP figures revealed growth of 4.7%.
However, the economy still remains 4.4% smaller than it was before Covid-19. This means there is still plenty of recovery needed.
A sharp rise in inflation could affect this because increasing inflation often leads to higher interest rates.
Higher interest rates may be good for cash savers. But, for those with debt or mortgages, higher rates mean they may have to pay significantly more to keep up with their repayments.
A distinct rise in inflation could also increase the price of essentials – like food. This means some households may have to cut other expenses to be able to put food on the table.
Businesses like restaurants, cafes and pubs may find they have fewer customers as a result. They may also need to increase their prices if their overheads increase due to higher inflation.
What do the experts think about inflation?
Kevin Brown, a savings specialist at Scottish Friendly, believes individuals are still seizing the opportunity to spend more freely post-lockdown and need little invitation to enjoy some of the extra cash they may have set aside.
He explains: “People are embracing the opportunity to shop in store and to eat and drink out, as shown by the fact that online sales made up the lowest share of retail spending since the start of the pandemic.”
The data reflects this too. According to the Bank of England, credit card spending is now at 99% of what it was pre-pandemic. A lot of people are spending a lot more on going out and socialising than they have for a while.
However, Kevin Brown said: “The big question is whether the post-lockdown recovery will extend beyond that if inflation rises sharply and the outlook for the economy remains uncertain?
“Households are more cautious than they were pre-pandemic and many may choose to protect the savings buffer they have built up over the past 12 to 18 months.
“But if the gap between inflation and the rate of interest offered on most cash savings accounts widens further, then households will have to consider where the best home is for their cash, particularly over the long term.”
The post Will post-lockdown recovery continue if inflation rises? appeared first on The Motley Fool UK.
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