WHAT IS TO BLAME FOR THE 2022 UK INFLATION RATE/OIL CRISIS? CHRISTY THOMPSON

WHAT IS TO BLAME FOR THE 2022 UK INFLATION RATE/OIL CRISIS?

Inflation in the UK has reached 9.1% in May, this is the highest it's been for 40 years. The COVID-19 pandemic has affected most major economies including the UK through the disruption of both supply and demand for goods. Lockdown measures implemented by the government changed consumer spending patterns around the world, the enforced shifts in demand caused demand-pull inflation for many products eg; toilet roll, hand sanitiser, home clothes etc. This is because firms respond to an increase in demand by increasing prices to maximize profit of their limited resources. Other goods had a decrease in demand which therefore led to demand-pull inflation eg; suits, footwear and petrol.

Lockdown measures have also caused a corresponding cut in production due to workers being unemployed or working from home, this resulted in a shortage in delivery and increase in production costs. This is a factor in the creation of the 2020 oil crisis. China has recently announced a new lockdown in 2022 due to spikes in COVID cases, this has had a knock on effect on production levels and costs, as China is a large supplier of many goods to the UK this has caused cost-push inflation.

COVID-19 was not the only cause of the oil crisis. A soaring demand for natural gas in households paired with a diminished supply from the U.S, Norway, Russia and European countries to the UK market was a result of Brexit. This caused massive rates of inflation in oil and gas. There was also less power generation by renewable energy sources such as wind, water and solar energy, and cold winters that left European gas reservoirs depleted also causing increase in inflation.

Russia supplied over 3 billion meters cubed per week (almost half of the EU’s imports). In the first two months after Russia invaded Ukraine on Feb 24 2022, Russia earned $66.5 billion from fossil fuel exports. As a result of the invasion, Russia’s oil prices rose above $130 a barrel for the first time since 2008. In May 2022, the European Commission proposed a ban on oil imports from Russia, part of the economic response to the invasion. This took away a huge chunk of oil supply therefore further increasing cost-push inflation on the UK economy. Unfortunately there is no sign of the oil crisis getting any better or the inflation rate getting any lower as the UK is forecasted to hit 11% by the end of the year.