In the first of a series of three articles, Russell Group managing director Suki Basi explores why UK inflation has risen so rapidly…

UK inflation

The number one issue facing consumers, businesses and government in the UK right now is inflation. 

At the time of writing, the UK Consumer Price Index – the main index for inflation – stood at 9.9 percent, down from the previous month’s figure of 10.1 percent, a level not seen since February 1982, which was in the wake of the Falklands War. To put this in context, a year ago, UK inflation was 3.2 percent.  

Over the course of three articles, I will outline why inflation seems to be rising, the impact of rising inflation on the (re)insurance sector and finally how (re)insurers and corporates can successfully navigate this difficult time. 

Shock to the system 

So, what exactly is causing UK inflation to skyrocket?  

Prices are rising simply because things are becoming more costly to make or produce, as the cost of supply – whether it be labour or material – has increased. These costs are then naturally passed on to the consumer in the final price of the product or service.  

Economists refer to this as “cost-push inflation”, and in the UK this rising inflation is caused by five main issues:  

Firstly, there is Brexit, which has added new administrative costs in the form of a new UK border scheme, which increases the time it takes for items to enter and leave the country, along with added administrative costs, all of which are passed on to consumers in the form of higher prices for goods and services. 

Secondly, the world is still recovering from the Covid-19 pandemic, which disrupted global supply chains, creating shortages of commodities such as semiconductors. Covid-19 also had an impact on global trade by delaying and disrupting trading schedules, meaning that many ports now have large backlogs with queues of vessels waiting to offload items. Also, in some cases, many ships are not waiting to pick up empty containers, creating a shortage of containers to transport items, all of which increase the freight costs for firms.   

Thirdly, there is the ongoing Russia-Ukraine conflict, which has seen global energy costs skyrocket, meaning that the cost of heating and powering both homes and businesses has become more expensive. 

Another issue is labour. Despite historic low levels of unemployment at 3.6 percent – a level not seen since 1974 – there are a record number of vacancies in sectors such as hospitality and retail. The current employment rate is at 75.4 percent, with 21.7 percent either economically inactive due to chronic health conditions or because they are studying, according to government statistics. Also, during the pandemic, over 500,000 workers, mainly over the age of 50, quit the workforce along with many continental workers returning to Europe after Brexit, according to various estimates. This has alarmed policymakers and experts, as a tighter labour market will mean that workers can demand higher wages. 

Finally, there has been a steep rise in the cost of materials, hitting multiple sectors, in particular the construction industry. The Construction Material Price Index, a key metric, rose by 26.4 percent in one year, pushed up by increases in concrete reinforcing bars (up 58.2 percent), fabricated structural steel (up 46.3 percent) and pre-cast concrete products (up 28.3 percent), as quoted in Strategic Risk. 

So how does this impact the (re)insurance industry? In my next article tomorrow, I will discuss how rising inflation is impacting the (re)insurance sector.

Suki Basi is managing director at Russell Group