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News channels have been quick to point out that the recently published inflation figures for August showed a record increase over the previous month, up 1.20% from 2% to 3.2%. On the surface of it, that looks pretty alarming. Is inflation getting out of control? Will we soon see sharp rises in interest rates as the Bank of England try to contain it?

As always, the truth is a little more nuanced. Firstly, you have to look at what was going on a year ago. In August 2020, the Chancellor's Eat Out to Help out scheme, was keeping restaurant prices artificially low. No such scheme exists this August, and so that will appear in the basket of goods as a significant increase. Adjusting for this one factor would reduce the August figure to 2.8%. Add in the temporary 2020 cut in VAT in the hospitality sector and it goes down further.

There is a neat comparison between the attitude of an economist looking at these monthly figures, and an accountant looking at a cash statement. Just like cash, there is no denying the fact that the monthly figure is real. It records the actual price of a basket of goods, and so will reflect the impact on consumers at that moment. But every accountant will know that while we have to treat the reality of cash with great respect, it is only by looking at the financials on an accruals basis that you can get a real reflection – "a true and fair view" – of the state of the company. Likewise, economists prefer to monitor figures over a period of time and to look instead at the underlying trends.

Inflation is typically considered to be caused by one of two things: excess aggregate demand in the economy that pulls prices up (demand pull inflation); and increases in the input costs for businesses, that ultimately result in companies having to put their prices up (cost push).

So, which do we have?

From a purely financial point of view, the pandemic has been felt very unevenly in society. While some people have suffered great hardship, others – principally white collar, knowledge-based workers – have fared much better. They have been able to work from home, and have saved money on transport, on lunches in cafes, and on holidays to countries they have not been allowed to visit. As they are released from lock down, it is reasonable to expect that group to spend some of the money they have saved. They might eat out more, lay a new garden patio or, when they are allowed, go on that long-delayed holiday. That will create excess demand and it will be felt quite widely in different parts of the economy. So yes, we have the potential for considerable demand-pull inflation.

What about cost push? Well yes again. From farmers saying that there won't be enough turkeys for Christmas, to queues at the petrol pumps not seen since the 1970s, businesses are finding it hard to source appropriately skilled labour. Hauliers are in particularly short supply. A loss of drivers from EU countries has combined with older retiring drivers not being replaced by the newly qualified as the pandemic forced driver training to be put on hold. Elsewhere, problems in the supply chain have forced up the prices of raw materials in the construction sector, and they are expected to stay high until at least the middle of 2022.

This is a worrying cocktail. Normally we have one sort of inflation or the other. Combining the two might be particularly difficult to combat. On the positive side, we can see that the demand side forces at least, may be relatively short lived.

Likewise there may be some alleviation of labour shortages, when the furlough scheme finally comes to an end this month. Having a million people being paid to stay home, when businesses are crying out for new recruits, seems a bit bonkers. Although we cannot expect the shortage of hauliers to be eliminated quickly – the vacant roles require proper training – the influx of the previously furloughed should help other sectors.

Two things seem sure:

  • We shouldn't over-react to one set of monthly numbers
  • The recovery, when it comes, will not be a smooth one.

We are in for a bumpy ride!

Alan Nelson is an author for accountingcpd. To see his courses, click here.

  1. Shu kai C
    Posted 17-Oct-2021 at
    The city locked down restrict the supply of labor force. No people go to operate the port, no people go to delivery the gasoline to city. The first shortage happened from the labor supply, and the shortage issue spread to the production of raw material. The demand side has to pay more to obtain the products or service. Price increases to push u ...
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