Part 1: Inflation and Its Socio-Economic Impacts

The cost of living is highly dependent on the economy's inflation rate. Inflation is considered the rate at which commodities and services prices increase over time (Oner, n.d). Over the years, scientists have forecast future inflation rates, enabling people to establish informed investments that contribute to economic growth (Mandeya & Ho, 2021). However, the increase in inflation rates can cause uproar and social tension in society since people may feel dissatisfied with their stagnant wages or salaries in an economically competitive environment. Therefore, inflation or inflation uncertainties can affect a country's financial or social status and economic growth, contributing to lower consumer spending and purchases, among others.

Part 2: UK Government Actions

Establishing control of the inflation rate ensures that stakeholders can control economic patterns. The government's inflation rate is targeted at 2% (Bailey, 2022). However, this rate may be higher due to factors such as; global events, for instance, the Covid-19 pandemic followed by the Russian-Ukraine war, the constrained labor market, and the pricing methods for organizations and companies (Bailey, 2022). The Russian invasion of Ukraine led to a surge in fuel prices, significantly affecting agricultural product prices and related energy sectors. Moreover, before the onset of the war, the prevalence of Covid-19 had negatively affected the economy, and many countries were struggling to recover. This shifted consumer expenditure to goods instead of services, crippling some business sectors (Bailey, 2022). The government has thus implemented the policy of increasing bank interest rates as a measure of curbing the rise in inflation rates (Bailey, 2022). Therefore, through this, they can achieve economic and inflation stability.

Part 3: Assessing the government actions /policies /practices

Higher interest rates have been associated with a reduction in inflation rates. This fact has been adopted by the government, which has set a policy of increasing the bank interest rates to achieve their 2% target inflation rate. According to Matheson (n.d), the cross-correlations from his study prove that higher interest rates lead to decreased inflation rates, which can be an informed policy in preparation for demand and supply upset. An increase in interest rates elevates the cost of borrowing money, which minimizes expendable income, limiting the rise in consumer spending and purchasing power (Pettinger, 2022). Moreover, it results in a rise in the currency value, which encourages investors to save their money in British banks if the UK offers higher interest rates than other countries. Hence due to the increased strength of the pound, the imports are increased compared to the country's less competitive exports (Pettinger, 2022). Due to the increased cost of borrowing money, mortgage interests are also significantly increased, altering housing capabilities as they affect consumer spending (Pettinger, 2022). Moreover, the rise in interest rates tends to encourage people to save rather than spend. This way, they are guaranteed higher returns on their money. However, it tends to lower the confidence of consumers and businesses in participating in risky investment opportunities (Pettinger, 2022). This is because most of the investments or purchases are made using loans, and failure in such investments may cost them a lot. Therefore, an increase in interest rates can lead to a reduction in the inflation rate, which can positively and negatively affect a country's economy and social status.

References

Bailey, A. (2022) Why has inflation moved away from the 2% target? [online] Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1083440/Governors_open_letter_June_2022.pdf (Accessed: 17 November 2022).

Matheson, T. (n.d) Interest rates and inflation, [online] Available at: https://www.elibrary.imf.org/ (Accessed: 17 November 2022).

Oner, C. (n.d) Inflation: Prices on the rise. [online] Available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation#:~:text=Inflation%20is%20the%20rate%20of,of%20living%20in%20a%20country. (Accessed: 17 November 2022).

Mandeya, S.M. and Ho, S.-Y. (2021) Inflation, inflation uncertainty and the economic growth nexus: An impact study of south Africa. MethodsX, 8, p. 101501. Available at: https://doi.org/10.1016/j.mex.2021.101501.

Pettinger, T. (2022) Effect of raising interest rates, Economics Help. [online] Available at: https://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/#:~:text=Higher%20interest%20rates%20increase%20the%20value%20of%20a%20currency%20(Due,reducing%20exports%20and%20increasing%20imports. (Accessed: November 17, 2022).