Inflation, a persistent rise in the general level of prices, poses significant challenges to an economy. Controlling inflation is crucial for maintaining economic stability and safeguarding consumers’ purchasing power. High and persistent inflation has been a significant global issue over the past 18 months, with global inflation reaching 9.3% in October 2022. The UK, however, has been hit especially hard by inflation, with price increases reaching a 41-year high of 11.1% last October. Recent inflation has been a mixture of both cost-push and demand-pull inflation. Whilst inflation has fallen significantly in the months running up to October 2023, it is important to consider what policies could be implemented in the future to avoid similar situations. I will be discussing central bank and government policies specific to the UK and policies for countries around the world that could aid in mitigating the impacts of such high levels of inflation. 

Supply-side policies spur economic growth by encouraging increased production, investment, and innovation through strategies such as tax reductions and deregulation. This fosters a dynamic and robust economic environment. They are arguably the main method of dealing with the consequences of high inflation. Cost-push inflation is inflation caused by increases in production costs, such as higher wages or the cost of raw materials, which are then passed on to consumers. By increasing the productive potential of an economy, it is likely that cost-push inflation would be less of an issue, which by Russia’s attack on Ukraine emphasised. Many western nations tried to reduce imports from Russia due to Putin’s actions, however, they have been struggling to cope with the consequences ever since. As an illustration, prior to the conflict, Germany, the largest economy in the Eurozone (comprising EU member countries using the euro), sourced 55% of its gas from Russia. A similar trend was seen across the Eurozone, with 40% of gas consumed coming from Russia. Since western countries are often more developed, it would be expected that necessities, such as oil and natural gas, would not be so dependent on one major source. 

In order to reduce the risk of turbulent energy prices, it is imperative that governments either produce their own energy or import energy from a much wider source of producers, rather than relying on one source. Domestically produced energy must be environmentally sustainable, which would ensure long-term reliability of energy. The US has shown great initiative for this, having invested $150 billion, in the past 9 months, towards capital for production of clean energy. A similar story is seen across the majority of western countries, for example, the UK gets 20% of all energy from clean sources. However, this figure needs to be significantly higher globally to reduce the effects felt by external shocks on oil and gas markets. As oil and gas reserves continue to deplete, the search for renewable alternatives becomes crucial. This is essential for environmental preservation and for controlling fuel prices, a key aspect in addressing global cost-push inflation. Diesel prices reached 198 pence per litre in July 2022, a consequence of reduced oil supply from Russia. 

The impact of food on inflation cannot be overstated. In the UK, food inflation has surged to 16.7% as of August 2023, mirroring trends in other Western nations. The ongoing conflict has significantly disrupted the supply chains of various essential foods, with a notable example being wheat, a crop for which Ukraine is a major producer. This disruption has contributed to the soaring prices observed in recent months. If governments enhanced their food security, potentially by promoting increased production of essential crops domestically, there would be a reduced dependence on imports, ultimately easing supply-side inflation. 

Demand-pull inflation describes when price levels increase due to an increase in consumer demand for those goods. Considering demand-pull inflation, central banks around the world have been raising their interest rates significantly over the last 18 months. Whilst this may be an effective measure to reduce inflation to an extent, I would argue that there are better methods of doing so. By increasing direct taxes rather than increasing interest rates, it is likely that inflation would fall faster and without causing as many negative effects. The UK’s interest rate rose to 5.25% in August, from 0.1% in March 2020, making it even more expensive for middle and lower income families to borrow and pay for basic expenses, such as mortgages. However, richer individuals benefit by the rise in interest rates, since they are usually the ones with more money saved, whilst not relying much on loans to spend. This widens income inequality in societies. Furthermore, this is a trend visible across the world, as seen in the Eurozone, with 3.5% interest and the US, with an interest rate of 5.25%. This highlights the struggles of those in those economies, which suggests that solely relying on interest rates may not be the optimal solution. 

Instead of this, it would be beneficial for more government controlled policy to be implemented, in other words fiscal policy. The benefits of this would be that money would still be taken out of circulation, therefore decreasing demand-pull inflation, whilst potentially having a better effect on the inequality rate. Progressive taxes must be used for this to happen, to make higher earners pay more tax. With this, inflation would come down due to a lower demand levels economy wide. Even though government expenditure could be higher, it would be brought significantly down by decreased consumption, due to lower levels of disposable income for all consumers. The advantages of this approach are that there is lower income inequality, as well as increased government income, which could be used, for example, to reduce the budget deficit. In addition to this, the efficiency of taxation over interest rates is much higher. This is because the effects of taxation are felt almost immediately, with the next salary an individual receives, but the effects of interest rates can be spread over multiple years, for example, for those who are on fixed rate mortgages. I don’t argue that this solution is perfect – more that it is something that should be looked at rather than ramping up interest rates. Depending on the situation of global economies when implemented, it is most likely that a mix of both monetary and fiscal policy would be best to use. 

By using supply side policies and fiscal policies more in an economy, the rate of global inflation would likely reduce significantly faster than it is currently. Governments must implement these policies whilst striking the right balance between reducing inflation and maintaining standards of living.