Why Russian Ruble has appreciated after sanctions

ruble-exchange-rate-may-2022

Despite unprecedented economic sanctions imposed on Russia, the Russian Rouble has become the best performing currency in the world. Rising 30% in the year 2022 to 26 May 22 (source: Reuters) After the initial sanctions and freezing of Russian foreign currency reserves, the Russian rouble fell  25%. But, since then the Rouble has performed a …

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Effect of higher interest rates and lower taxes on living standards

uk-inflation-interest-rates-may-2022

Reader’s Question: The Central bank is raising interest rates (I understand why). At the same time, the government is being called to reduce taxes. These appear contradictory policies to me? What am I missing? In summary You are right they tend to have opposite impacts on consumer spending and economic growth. Higher interest rates tend …

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UK Inflation Rate and Graphs

UK-CPI-Inflation

Current UK Inflation Rate

UK-inflation-may-2022

 

  • CPI inflation rate:  9.0% (headline rate) CPI – D7G7 at ONS
  • (page updated 19 May 2022)

Other measures of inflation

Reasons for low inflation in the UK until 2021

  • Low worldwide inflationary expectations. Europe is experiencing very low rates of inflation.
  • Fall in global inflation rates since 2007.
  • Reduced consumer spending due to Covid downturn
  • Weaker commodity price growth.

Reasons for surge in inflation during 2022

  • Rising oil prices
  • Rising gas prices
  • Ukraine war disrupting gas/energy and food supplies.
  • Lingering supply side issues from Covid lockdowns and impact on price of shipping.

Inflation trends in the UK

uk-inflation-since-1970

Despite temporary cost-push inflationary factors in 2017, underlying inflationary pressures remain muted – at least compared to the past four decades.

The current UK inflation rate compares favourably to much of the post-war period.

1970s Inflation

The 1970s frequently saw double-digit inflation. This was due

  • Cost-push factors – rapid rise in oil prices
  • Rising wages due to powerful trade unions trying to keep up with living costs.
  • Lack of independent monetary policy
  • Inflation expectations rose

Late 1980s inflation

The inflation of the late 1980s was due to

  • Rapid economic growth ‘The Lawson Boom‘ – growth was above the trend rate causing supply shortages
  • Rise in house prices fuelling wealth effect
  • Lack of independent monetary policy. The policy was partly set by ‘shadowing the D-Mark’ which led to loose monetary policy in late 1980s

Inflation and wages

  • Real wages = nominal wages – inflation.
  • Usually, during a period of economic growth – wage growth is higher than inflation, this leads to positive real wage growth.
  • During the economic recession of 2009-13 – we had a prolonged period of negative real wage growth. Wages rising at a slower rate than inflation.
  • The end of 2014 saw the first signs of renewed wage growth and positive real wage growth.

wages-inflation-mar-2022

 

Since 2008, there has been an unusual period of negative real wage inflation. (inflation higher than wage growth)

However, since the recovery from the Covid downturn, there has been a sharp increase in wages (likely to prove temporary)

See more at UK wage growth

Inflation since 1990

uk-inflation-1989-2021-

  • Inflation rose over 8% in the late 1980s due to the Lawson boom, which was a period of unsustainable economic growth.
  • Inflation was low in the period 1992 to 2007. This was a period known as the ‘great moderation’
  • The inflation of 2008 and 2012 was due to cost-push factors (devaluation and rising commodity prices)

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History of Inflation in UK

RPI-inflation-1949-2022

The UK has avoided any situation of hyperinflation. The highest rates of inflation were after the Napoleonic War in the early nineteenth century. During the First World war (25%) and in the 1970s where inflation rose due to a rise in oil prices and strong wage growth.

After the late 1980s inflation was brought under control, inflation remained for nearly two decades – during a period known as the great moderation. However since 2008 we have seen periods of cost-push inflation, most notably in 2022, with inflation rising close to 10% due to rising oil, gas and food prices.

Inflation means an increase in the general price level and has the effect of reducing the value of money. Rising prices mean money buys less than it used to. See: Definition of Inflation

Inflation since 1860

 

historical-inflation-1860

Inflation 1949-2015

RPI-inflation-1949-2022

Periods of  Inflation in UK

1920s/30s deflation

1914-38-inflationUK

After the inflation of the First World War, the UK experienced deflation (falling prices) during the 1920s and early part of 1930s. This deflation was due to tight monetary and fiscal policy and an overvalued exchange rate (Gold Standard).

See more detail at: Economics of the 1920s

Inflation in the 1960s and 1970s

inflation

In the post-war period, the UK economy experienced strong growth with moderate inflation.

However, in the 1970s, we see inflation rising to double figures and reaching over 25%.

This inflation was due to rising oil prices (oil prices tripled in the 1970s). There was also inflation due to rising wages. Unions were relatively powerful and were bargaining for higher wages to keep up with the rising cost of living – causing a wage-inflationary spiral.

See also: economics of the 1970s

Inflation since 1989

uk-inflation-may-2022

Towards the end of the 1980s, the UK experienced rapid economic growth. This growth of 4-5% a year was significantly higher than the UK’s long run trend rate of economic growth. This excessive economic growth led to demand-pull inflation of 8%. See: Lawson boom.

In 2022, the inflation was cost-push inflation caused by rising energy, food and fuel prices.

Periods of Inflation In UK

Deflation of the 1920s and 1930s.

The UK hasn’t always had inflation. In the 1920s and 30s, there was a long period of deflation (falling prices). This meant the value of money increased. The 1920s and 30s, were generally a period of low growth and high unemployment.

Inflation of the 1970s

inflation-1970s

The highest peace time inflation occurred in the 1970s, when inflation rose due to wage push and oil push inflation. See: Economy of the 1970s

Cost push inflation of 2008/12 and 2022

  • Since 2008, periods of inflation have been mainly due to cost-push factors. For example
  • 2008 – due to rising oil prices.
  • 2012 – Higher taxes, rising import prices from devaluation.
  • 2022 – Rising oil and gas prices, rising food prices. Effect of devaluation, Covid supply chain issues, Brexit cost issues. Supply side constraints.

Inflation 2008 – 22

UK-inflation-may-2022

he UK experienced periods of cost-push inflation during 2008-2013. This inflation was caused by rising oil prices, devaluation of Pound and higher taxes. See: Cost push inflation

Historical Inflation and Interest rates

Inflation and Interest Rates since 1900

Interest rates and Inflation since 2003

uk-inflation-interest-rates-may-2022

Before, 2008, interest rates were generally higher than inflation. But since the financial crash of 2008, interest rates have been close to zero because of weak economic growth. This means inflation has mostly been higher than interest rates – causing negative real interest rates.

More historical interest rate data.

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Policies to reduce cost-push inflation

reducing-cost-push-inflation

Cost-push inflation is caused by higher costs of production, such as rising oil prices, higher nominal wages, and increased commodity prices. To reduce this kind of inflation, the government can pursue deflationary monetary policy and/or supply side policies. But, in truth, it is difficult to reduce cost-push inflation because higher interest rates are likely to …

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The impact of supply bottlenecks on world economy

uk-inflation-forecast

Bottlenecks refer to the situation where firms are unable to meet demand because of delays, shortages and lack of spare capacity. Bottlenecks can occur from a spike in demand or disruptions to supply. They can lead to higher prices, inflation, shortages of goods and even lower economic growth. For many years, we have grown accustomed …

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Inflation tax

wages-inflation-mar-2022

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily,” John Maynard Keynes, “The economic consequences of the peace” Inflation tax is an implicit tax on nominal assets, such as cash, bonds and …

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