In the field of economics, inflation is characterized by a constant or sustained increase in the cost of goods and services. Inflation is measured annually and monthly and is given as a percentage. When UK inflation grows, the British pound is able to purchase less of a good or service than it previously could. When it sinks, it is sign that companies and consumers are hoarding cash, rather than reinvesting it in the economy.
Inflation is a natural part of the economy. Over the long term, inflation increases a little bit each year, ultimately resulting in huge disparities over a longer period of time. For example, the Bank of England’s inflation calculator suggests that one British pound worth of goods in the year 1750 is the equivalent to nearly 200 pounds sterling in 2015 when the inflation rate is calculated at an average of 2% a year. However, recent history has seen serious fluctuations in the rate.
The inflation rate in the UK is dependent on the health of the economy as a whole. In fact, one can track economy’s success and point out individual events by looking at the changes between months or over years. For example, inflation stayed below 10% on average between 1948 and 1951, when it jumped up to 11 or 12%. By 1952, the rates were already dropping dramatically, reaching 6% by the end of the year and 1% by the end of 1953.
For two decades, UK inflation remained under 10%, even dipping below 0% and signaling deflation. In 1974, it reached 16%. By the summer of 1975, it grew to reach levels as high as 26%, which was inline a period of economic stagnation and recession in the UK. The rate did not reach normal levels below 10% until 1978; though, it briefly hit 20% again at the beginning of the 1980s.
For the next decade, inflation would drop slowly and by the 1990s, the British economy experienced rates that never surpassed 5%. When the 2008 crash happened, Britain saw almost a full year of a deflation, with the rate bottoming out at -1.9% before rebounding into the black in December of 2009.
The deflation was a result of the 2008 crash and theoretically helped British consumers do more with less money during the crisis. The Bank of England managed deflation in part by slashing interest rates to 0.5%. However, the period was also met with rising unemployment which is a common characteristic of negative inflation.