By John Boothman
INFLATION FAQs
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What is inflation?
It’s a rise in the general level of prices, reducing the purchasing power of money.
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What causes it?
Economists classify inflation as ‘cost push’ or ‘demand pull’. Businesses facing rising costs (of raw materials, labour or premises, for example) will seek to pass on those increases to customers by raising prices. Similarly, if consumer demand increases more rapidly than production, businesses will generally take advantage of this by increasing prices. The present bout is the result of rising energy costs and global supply disruption (caused mainly by the pandemic aftermath, trade protectionism and the Ukraine war), so cost push.
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Does inflation mean all prices rise at the same rate?
No. The rate of increase for individual goods and services will depend on factors that vary from one sector to another: for instance, a sharp rise in oil and gas prices will have a greater impact on products that are energy intensive.
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So how are inflation rates calculated?
Statisticians put together a standardised ‘basket of goods and services’ intended to represent the spending patterns of a typical household, then measure the rate of increase of each item, to end up with a weighted average.
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Why is inflation in Jersey so much higher than in the UK?
Inflation here is measured on a quarterly basis, using the retail price index (RPI). The most recent figure, at the end of March, showed a year-on-year RPI increase of 12.7%, well above the UK which, for the same period, was 10.1%. One reason for this is that average housing costs are far higher in Jersey than the UK, so take up a greater part of the index. Other factors include increases in shipping costs (to which as an island we are more exposed) and the generally higher level of consumer affluence, which means suppliers can push through price increases more easily than in the UK.
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With price rises outpacing pay rises, surely raising interest rates is the last thing we need?
It is true that house buyers coming to the end of fixed mortgage terms are in for a nasty shock, but in ‘real’ terms (ie adjusted for inflation) even at these higher levels borrowing costs are far below inflation. Looked at another way, with inflation of (say) 10%, the purchasing power of money on deposit earning 5% is declining by 5% a year even after the interest has been rolled back in.
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Could the government of Jersey do more to dampen down inflation?
Not much – most of our inflation is imported from the UK. The JCRA (competition regulator) could try a bit harder to break down price-fixing and other anti-competitive behaviour, and perhaps look again at freight rates. Rent controls are popular with some but run the risk that more landlords throw in the towel, further reducing the stock of rental properties.
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What can we do to shield ourselves from the effects of inflation?
If you’re employed, lobby the boss for a pay rise. If you’re a consumer on a tight budget, instead of always choosing the same supermarket shop around – you’ll be surprised how much prices can vary.
The same applies to mobile phone tariffs, hairdressing, car repairs and a host of other local services. If you’re thinking of buying a house, proceed with caution: as mortgage rates rise, prices may fall further.
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Is inflation always a bad thing?
No – if you took out a 25-year loan last year fixed at 2% to finance an asset rising in value by 10% annually, you must be feeling quite smug. Generally, debtors do better than creditors, as the real value of their debts shrinks. In the short term, house prices are more likely to fall as mortgage-holders are squeezed and some become forced sellers; but over time, as wages gradually catch up with prices, property values tend to rise too. That’s what happened during the inflationary 1970s. Taken in the round, though, inflation creates more losers than winners.
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Where do we go from here?
The great danger of inflation is that it becomes a spiral: higher prices mean bigger pay demands, raising production costs and leading to further price hikes. That is what happened in the 1970s and it took years of austerity to break the cycle. This time the authorities have gone for the short, sharp shock of successive interest-rate rises to dampen down demand. Will it work? Time will tell, but my guess is that we’ll be tightening our belts another notch or two before inflation is brought under control.
