Why is Inflation Increasing? – and Prospects for Inflation

Readers Question: Why is Inflation Increasing?

In the last economic quarter, the UK economy stagnated 0% growth. At this stage in the economic cycle, you would usually expect a lower rate of inflation. – As demand in the economy falls there is downward pressure on prices causing lower inflation rates.

Inflation is increasing because of cost push factors. In particular the cost of living is rising because of

• Higher oil prices – leading to higher petrol prices, and higher transport costs which affects all goods.
• Higher food prices – caused by a combination of rising global demand and bottlenecks in supply.
• Rising Energy prices – the price of natural gas is linked to the price of oil.
• Rising commoditiy prices such as metals and minerals. Many blame rapid economic growth in India and China for this increased demand and higher prices

• CPI Inflation is 4.7%, RPI is 5%.

Having said all that, I feel the prospects for inflation is that inflationary pressures will reduce in the coming year.

• The slowing economy, rising unemployment and on going credit crunch will reduce demand pull inflation further
• Global recession has already caused the price of oil to fall from its midsummer peak.
• Evidence of food prices stabilising as supply bottlenecks overcome