ECON 98
heroica
A CURE TO YOUR CONFESSION THAT YOU’RE CLUELESS ABOUT THE
BY LU CY H AG E R
P
rices are heating up and cash is feeling tighter, which is definitely not ideal. For many of us, this is the first time that we’ve experienced something of this sort happening with the economy. Perhaps you’ve been finding yourself at the checkout, astonished at the numbers clicking up at the cashier, realising that your money isn’t going to go as far as it used to. Perhaps you want to learn more about why this is, but the idea of having to ask a finance bro for a mansplanation makes you want to rip your hair out. Well, have no fear. I’m here to jump in and demystify these topics and break things down so that you’re in the know without having to resort to said mansplainer.
INFLATION: AKA WHY YOU’LL BE $AYING ‘BACK IN MY DAY, A LOAF OF BREAD WA$ TWO POUND$’ TO KIDDIE$ Simply put, inflation is rising prices. This ranges from anything from supermarket prices to houses to wages to anything with a price tag. Prices rise when the economy gets overheated. When there’s a lot of spending going on and cash floating about, the excess cash generated leads to higher prices as items and services keep up with changing perceptions of what a pound is worth. This can happen for several reasons. For one, after periods of large government spending (think pandemic relief, or when governments print lots of cash and have a splurging party). Strong demand also means consumers (for example, exiting a pandemic) are fuelling a hot economy due to splashing cash themselves, which can lead to firms being able to increase charging prices and make a cheeky extra profit (yay capitalism). Lastly, inflation also occurs when prices for certain goods climb due to external pressures (like grid shortages, oil shortages and higher production costs for certain materials).
Many countries, including those here in the UK, are currently struggling with this phenomenon. A combination of volatile events has coincided, which is what has led to the cost-of-living crisis. Following government pandemic spending – which helped keep the UK economy relatively steady through a huge unanticipated shock – a lot of spending continued, which began to push up prices (see paragraph two again for inflation). The pandemic hit global supply chains particularly hard. Transportation and sourcing goods became ever more problematic and led to many firms charging elevated prices as lockdowns and staff absences generated shortages across multiple sectors (here’s an example of those external pressures I mentioned). This has resulted in boosted prices for incoming goods and scarce goods, which spills over into other costs. An interesting example of this chain reaction of events is the semiconductor chip shortage (those little things that power our smartphones, TVs, laptops and cars). With so many people working from home, the production of home electronics was ramped up to enable the work-from-home shift. At the same time, demand for cars plunged, so chip manufacturers switched over their production to home electronics. When the market for home electronics was again saturated (this means customers are stocked up, not buying any more monitor screens), and the auto industry resumed, a massive chip shortage ensued. The rule of thumb in economics is that scarcity (chips here) makes things more expensive (not much supply, a lot of demand!). Electronic and auto production slowed to the extent that second-hand car prices went through the roof as new cars became difficult to produce. See where I’m going here? Small knock-on effects like this led to inflation across the greater economy.
