UK recession

 UK Inflation and Recession: What's Up?

The Surge of Inflation: A Post-Pandemic Reality

Inflation Defined: A sustained increase in prices of goods and services, beneficial at 2-3% but harmful at double digits like the UK's 11% post-pandemic.

Root Causes:

• Increased food and energy bills, driven by the pandemic's aftermath and the Russia-Ukraine war.

• The war's impact on oil prices and food supply chains led to higher costs for essentials like fertilizers and animal feed (cost-push inflation).

• Consequence: A supply-demand mismatch, pushing prices upward and fueling inflation.

: Interest Rates: The Double-Edged Sword

Strategy: To combat inflation, the UK raised interest rates from around .3 to 5.25%, aiming to curb the rise in living costs by reducing spending power.   

Impact on Households: Higher interest rates mean increased mortgage repayments, reducing ability to spend as a lot money is spent on mortgage repayments.

 (ex.  To calculate how a change in interest rate from 0.3% to 5.25% would affect the average mortgage repayment value,   Principal loan amount (P) = $600,000 Loan term (n) = 15  years   

At .3% repayment is 4,095.66   at 5.25% repayment value is 5,067.22 which mean the difference is almost  1000 pounds. A significant drop in savings due to a rise in interest rates) 

Economic Consequence: Reduced overall spending and demand led to the recession the UK is currently facing. Britain's gross domestic product (ie overall spending) shrank by 0.3 percent in the last three months of 2023, after contracting 0.1 percent in the third quarter

The Ripple Effects of Recession

Recession Defined: A period of negative economic growth (ie reduced overall spending by people in the country ), lasting for two or more quarters.

Human Cost: Due to recession where consumers spend much lesser on various goods  which means companies make lesser money this leads to companies firing the workers.These workers will find it hard to pay for food,mortgage and various necessities

Living Crisis: A rise in the price of energy and food has contributed to a cost of living crisis, where people cannot afford the living they were used to due to lower incomes and higher prices.

Impacts on Stakeholders

For Families:

Hard to Make Ends Meet: With interest rates higher families have to pay much higher in mortgages which means they have very little to spend on other essentials such as food. Over 15 percent of UK households went hungry last month.  

For Businesses:

Costs Going Up: Companies are facing higher expenses to make their products because of rising energy and raw material prices. Some might have to raise prices or cut jobs to stay afloat. Pfizer, Rolls Royce ,Barclays are some of the many companies that have cut off thousands of jobs to cut costs. 

For the Government:

Spending More Money: The government has to spend extra to help out struggling families and businesses. This puts pressure on their budgets and might mean they can't afford other important things such as investing in infrastructure or education. Uk government has spent over 40 billion pounds to protect its citizens from rising energy costs itself.  Support to households to help with the high cost of living is worth £104 billion over 2022/23 to 2024/25, 

  

In Summary

The high cost of living prompted the government to take action, implementing measures aimed at curbing the inflationary pressure. However, these measures inadvertently burdened consumers, rendering many unable to afford necessities like food and energy. Yet, without these interventions, prices would have surged to a point where affordability for consumers would have become a serious concern. Thus, while the measures aimed to alleviate inflationary pressures, they inadvertently exacerbated the financial strain on many households.