ECONOMY

So, we have a cash-splashing government pumping money into the economy and post-pandemic spending sprees, as well as supply issues pushing up shortages. And then add the unjustified invasion of Ukraine by neighbouring Russia to the mix. Sanctions on Russian energy generates scarcity (a favourite term in economics) as the supply of Russian oil and gas has been cut off by western sanctions, leading to higher energy prices. Many nations stopped importing Russian goods such as fertilisers and wheat, making food prices boom at the supermarket. And to make matters worse, Ukraine was doing a great job of generating half the world’s neon supply, which is a key ingredient in – you guessed it – semiconductor chips.

WHAT I$ THE BANK OF ENGLAND? AND WHAT DO THEY HAVE TO DO WITH THE PRICE OF EGG$?

So, who’s going to get us out of this mess? Central Banks are responsible for keeping inflation in check. In most developed countries, you’ll hear about a 2% inflation target, which means it’s good if prices rise gently by 2% every year because it spurs the economy to keep spending now (because future prices will be a little higher) and thus the economy continues growing gently. The Bank of England is responsible for literally printing money and keeping prices in check. It does so by setting ‘monetary policy’ for which the key tool is setting the policy bank rate (bear with me). This is the cost of money that the Bank of England charges commercial banks (where you keep your cash). When inflation starts getting high, like in the current economic climate, the Bank of England gets together and decides to increase what is called the bank rate. This means it’s more expensive for your bank to borrow cash from the BOE, and it’s more expensive for you to borrow cash from your bank.

On the other hand, higher interest rates mean you earn more on your savings. So basically, you’re less likely to borrow and splurge and more likely to tuck away your savings in the bank, all of which reduces the amount of cash circling through the economy, which (scarcity rule!) means prices should come down again.

WHAT DOE$ THIS MEAN FOR YOU? $TICKY WAGE$ AND WHY A 5% RAI$E I$ CURRENTLY ACTUALLY A 4% CUT

Some prices rise faster than others, which creates imbalances. Coffee shops can up the price of your oat latte by 50p pretty easily, but wage renegotiations are slow, tedious processes that are in economic terms ‘sticky’: they can’t smoothly rise along every month that prices go up. This means that the cost of living is getting very pricey for the average person, and everything but their wage is going up. That’s why transport staff are striking, and it’s why you need a raise from your employer to keep your level of income in real terms stable (aka what it can actually buy you when prices go up).

Inflation is at 9% currently (things cost an average of 9% more right now than this time last year). So, if your boss offers you a 5% raise, you can tell them that raise means you’re still 4% poorer than you were this time last year. Any rise under 9% (matching inflation) is actually a cut. It’s businesses that are more capable of bearing the brunt of inflation than individual people, so it is completely valid to expect your raise to be above the inflation rate.

Well, there you have it. You now know the basics of the economy. If you want to gain a deeper understanding and keep avoiding the mansplainers, you can check out the YourJuno app, or the book Money: A User’s Guide by Laura Whateley is also a great place to start. ✦