A number of economists are now leaning towards the view that we’ve entered a more structural inflationary period and that inflation is here to stay for the short-to-medium term. However, simple maths tells us that from the spring, some price rises will drop out of the annual headline inflation data. This will leave us with higher price levels, but a much lower inflation rate.
Seldom does inflation get as much attention as it has done over the past year or so. The news cycle continues to be awash with supply chain problems driving inflationary pressures and the impact it is having on a global scale. The UK construction sector has seen its fair share of inflationary rises in 2021 with material prices rising at record rates and wages showing potential signs of following suit. Higher logistics, shipping, fuel and energy costs have added to the growing wall of input cost pressures, but we suspect some of these will ease throughout 2022.
Inflation is a key measure of how the economy is doing. For the first time in a decade, headline inflation has exceeded 5%, prompting the first interest rate rise in three years. With inflation so high (and expected to peak higher in the spring due to rising energy prices), the importance of productivity and efficiency becomes elevated as businesses carefully consider their cost base. The Bank of England’s main concern is not so much what inflation does in the coming months, but whether it triggers longer-term inflationary pressures, namely wages in a tightening labour market.