Inflation rates are already at some of their highest levels in 40 years, rising by 9% a year in the UK. If the inflation rate increases further to reach 10%, it means that the cost of living will become even more expensive than it is now. This will lead to less economic growth as people will be spending less.
Moreover, more people are turning to refinancing and even selling off high value assets in order to pay off debts that are spiraling out of control and in some cases even just get by and pa for day to day expenses, so much so, that Google searches for “sell house fast” and “debt management” gave increased in recent months, highlighting the financial plight of the general population.
Why has inflation increased?
Prices in the UK have risen sharply in the last year; the speed of this increase is known as the rate of inflation. There are multiple reasons for why inflation is currently so high.
One of the reasons is due to the economy recovering following the coronavirus pandemic. Many businesses were forced to shut down during the pandemic which meant that, once restrictions started to ease, businesses were not necessarily prepared to keep up with the demand of their customers. This pent-up consumer demand has caused prices to increase.
In addition, the events in Russia and Ukraine have pushed prices higher still. As Russia and Ukraine are responsible for nearly a quarter of the world’s wheat exports, this has added additional pressure on global wheat supplies meaning that prices have soared for wheat and wheat alternatives.
The instability in Russia and Ukraine has also affected the wholesale prices of oil, pushing fuel prices to some of the highest levels ever seen.
Inflation has risen dramatically as a result of these prices being pushed higher.
What happens when inflation reaches 10%?
When prices rise by more than 10% annually, this is what is referred to as Running Inflation which flags a serious need for the implementation of monetary and fiscal measures in order to control the state of the economy. If it rises higher, it can lead to hyperinflation.
The key impact of high inflation is an erosion of purchasing power. When inflation is high, it means that the cost of living increases and goods and services become less affordable. With the same amount of money, you will be able to buy less than you previously could. This often leads to more people having to look for loans and finance options, including the likes of ?1,000 loans as well as other secured and unsecured loan options, just to get by.
However, the exact variation in cost will vary depending on the good or service. In general, an inflation rate of 10% will mean that your overall cost of living will be more expensive. For those who have money saved, the real value of their money will decrease as a result of the high inflation rates.
Another thing that happens is that the poor are impacted disproportionately. Low income households tend to spend a greater proportion of their income on essential items such as groceries, utilities and rent. If these things are more expensive, yet their income has not increased, they will find themselves struggling to make ends meet.
What can be done if inflation reaches 10%?
If inflation reaches 10%, the Bank of England will likely raise interest rates. Although this can be a benefit for those with savings, it means that it will become more expensive for those who need to borrow money as well as those who have mortgages and secured loans in the UK. As a result, they will be able to buy less; if consumers are buying less, there is lower demand, which pushes prices down.
However, that said, most of the inflation being experienced currently by the UK has been caused by external factors; this means that we may need to ride the storm and wait for this global influences to change.
