Understanding the world of economics can sometimes feel like piecing together a puzzle, especially when it comes to concepts like inflation and the cost of living. While it’s commonly believed that falling inflation should lead to lower prices, a curious situation has arisen in recent times: inflation is decreasing, but the prices of everyday essentials continue to climb. Let’s unravel this puzzle and explore why this is happening in the context of the UK.
Decoding Inflation in the UK
Inflation refers to how much prices of goods and services increase over time. Think of it as the gradual rise in the cost of things we regularly buy. In the UK, this is typically measured using the Consumer Price Index (CPI), which helps us understand whether the overall price level is going up or down.
The Intriguing Twist: Falling Inflation, Rising Costs
Even though it might seem counterintuitive, there are several key reasons why prices are still on the rise, even as inflation appears to be easing:
- Supply Chain Hiccups: In our global economy, goods often come from various countries. When something disrupts the flow of these goods, such as trade issues or transportation problems, it can lead to shortages. When demand remains strong but supply falters, prices can increase, even if general inflation is slowing down.
- Shifting Ways of Doing Things: Changes in technology or shifts in what people want can sometimes cause disruptions in how products are made and sold. While these changes might eventually lower costs, they can be expensive to implement initially. This can result in higher prices for a while, even if inflation is trending lower.
- Wage Pressures: When wages rise for people who make or provide goods and services, it’s a positive development. However, if businesses have to pay their employees more, they might raise prices to cover these higher expenses. This can lead to higher costs for consumers, even if overall inflation isn’t surging.
- Delayed Effects of Economic Policies: Decisions made by institutions like central banks to control inflation take time to influence the economy. So, even if measures are put in place to reduce inflation, prices might keep climbing for a period until those actions start to take effect.
- Impact of Key Resources: Fluctuations in the prices of crucial resources like oil and metals can significantly impact production costs. If these prices rise, it can lead to higher prices for end products, even if general inflation is showing a downward trend.
Summing Up the Puzzle
The scenario of rising prices amid falling inflation may appear perplexing, but it’s like a jigsaw puzzle with different pieces that fit together. It’s essential for economists and experts to consider various factors that influence prices, rather than focusing solely on one indicator. For the general public, understanding that everyday costs can rise due to a variety of factors, even when headlines talk about falling inflation, is key.
Inherently, if inflation is above 0% then the cost of goods are rising. If inflation drops from 10% to 8% then the rate at which the cost of goods are rising has started to slow, however they are still rising by 8% pa. Products will not become cheaper as inflation falls (unless it goes negative), they will just be increasing at a slower rate.