The UK’s inflation soared to a four-decade high of 9.1% in May 2022 as food and gasoline prices rose due to the Russia-Ukraine conflict. Millions of people in the UK and throughout Europe are witnessing a rise in the cost of living, which is partly attributed to the Russia-Ukraine conflict that is rapidly depleting the supply of essentials such as wheat and energy.
Is the Worse Yet to Come?
After an increase in household energy prices, which could be announced in October 2022, the Bank of England expects the inflation rate to peak at more than 11%. Although the unemployment rate in the UK is low, average salaries failed to keep up with inflation, and real purchasing power is about to decline at a rate not observed in decades, which is the cause of growing alarm across the country.
No Relief Yet for GBP
As of June 23, 2022, the GBP/USD is trading at 1.22, close to the psychological low of 1.2000, where it received critical support in 2017 and 2020. However, due to an increasingly dangerous gap between inflation and interest rates, which could devalue debt, that support is unlikely to survive the third test of strength. Moreover, this could prove to be a risky policy change that could undermine confidence in the financial system, necessitating decisive and harsh measures to revive the economy.
The UK Compared to The World
Higher prices of energy owing to Russia's invasion of Ukraine have been the major contributors to the increase in inflation in other countries in 2022. As a result of the Russia-Ukraine conflict, food prices increased sharply all over the world. In the UK, this increase comes on top of the price rise associated with the country's exit from the European Union. Food prices rose over two years to the end of 2021 as a result of new trade frictions between the UK and the rest of Europe. Inflation in the UK has also been exacerbated by a weakening pound, which raises the cost of imported goods and services. As a result, the central bank would need to raise interest rates faster than in the past to strengthen the currency to dampen inflation.
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