UK inflation jumped to 3.8% in July, the highest rate in a year and a half. Costs have skyrocketed across the board—airfares in particular. This peak happens to be during the period when the school summer holidays begin. These most recent numbers underscore the incredibly difficult environment consumers are operating under. In comparison, the Bank of England is doubling down on its efforts to combat inflationary pressures well above their 2% target.
We awoke to great news this morning from the Office for National Statistics (ONS). The annual inflation rate reached 3.8% for the year ending in July 2023. This number reflects a significant increase over recent months and presents additional headaches for economic policy makers. The Bank of England‘s remit is to keep inflation under control, but with inflation now well above target.
In fact, airfares have been blamed as one of the main culprits behind this latest spike in inflation. As families started to travel for summer vacations, demand for air travel surged, causing skyrocketing ticket prices. Aviation services prices soared this quarter as consumer demand surged. Households prepared for trips taken during the summer and increased summer recreation activities.
While we saw airfares in particular surge, many other influences have driven up the costs of most everything — from groceries to household goods. After two years of pandemic recovery, demand for goods and services has surged, adding even more fuel to the inflationary fire. Firms reacted to the inelastic short-term spike in demand by increasing their prices. In effect, consumers lost out on the benefits of these innovations and cost savings through a higher cost of living.
Economists of all stripes are watching these changes with rapt attention. If inflation stays above the Bank of England’s target, they should advocate for additional changes in monetary policy. The central bank’s leadership has suggested in the past that they would not rule out hikes in their interest rates if inflationary pressures prove more durable. These types of measures are meant to reduce demand and cool inflationary prices, but in doing so, they risk creating a drag on economic growth.
Alongside this new July inflation figures, we have a better idea of the economic environment across the UK. This increase is due in part to seasonal price influences, but represents the continuing structural changes taking place within our economy. Persistent supply chain disruptions and labor market challenges continue to play a role in determining pricing dynamics. This makes for a confusing landscape for consumers and policymakers alike.
Over the past few months, the UK experienced a rollercoaster of inflation. There are multiple forces propelling these changes, such as higher energy costs and the pandemic-related change in consumer behavior. The current rate, which increased to 3.8%, prompted discussion of the affordability burden imposed on households, especially on those already pinched by multiple economic stresses. With costs going up across the board, countless families are having to reconsider what they can afford and how they’re spending their money.
External analysts have predicted some inflationary pressures to abate with diminishing seasonal demand. They caution that the long-term forces pushing up higher prices might persist longer than anticipated. This would lead to a long-term trend of high inflation, leading to increased suspicion from economists and policymakers alike.
