HomePoliticsWhat is the UK inflation rate and why is it so high?

What is the UK inflation rate and why is it so high?

The rate at which prices are rising fell to 6.8% in the year to July, down from 7.9% in June. Food inflation on items like milk, bread and cereals has come down, although remains high – at 14.9%.

What does inflation mean?
Inflation is the increase in the price of something over time. If a bottle of milk costs £1 but £1.05 a year later, then annual milk inflation is 5%.

How is the UK’s inflation rate measured?
The Office for National Statistics (ONS) tracks the prices of hundreds of everyday items in an imaginary “basket of goods”. The basket is constantly updated to reflect shopping trends, with the most recent changes adding frozen berries and removing alcopops. Each month’s inflation figure shows how much these prices have risen since the same date last year. You can calculate inflation in various ways, but the main “headline” measure is the Consumer Prices Index (CPI).

What is core inflation?
Core inflation excludes the price of energy, food, alcohol and tobacco. This measure was 6.9% in July, unchanged from June which saw the highest level since 1992. The Bank of England considers this number as well as the headline inflation figure when deciding whether to alter interest rates.

Why are prices rising so fast?
Soaring food and energy bills have helped drive inflation up. Alcohol prices in restaurants and pubs also rose.

How does raising interest rates help to tackle inflation?
The Bank of England has a target to keep inflation at 2%, but the current rate is well above that. This makes borrowing more expensive, and can mean some people with mortgages see their monthly payments go up. Some saving rates also increase. When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises. Businesses also borrow less, making them less likely to create jobs, and may cut staff. But when inflation is caused by factors such as global energy prices, action from the Bank of England may not be enough to slow it down.

Are wages keeping up with inflation?
Many people’s pay isn’t keeping up with rising prices. But when you take inflation into account, it actually fell by 0.6%. Unions say wages should reflect the cost of living and many workers have been striking over pay. However, the government argues big pay rises could push inflation higher because companies might increase prices as a result.

When will inflation go down?
Lower inflation doesn’t mean prices fall. It just means they rise less quickly. The Bank of England has predicted inflation will drop to 5% by the end of 2023, rather than the 4% it had been anticipating. But he admitted that price inflation was being “more sticky than previously expected”.

What’s happening to inflation and interest rates in Europe and the US?
Other countries have also been experiencing a cost-of-living squeeze. Many of the reasons are the same – increased energy costs, shortages of goods and materials, and the fallout from Covid. The European Central Bank has also been increasing interest rates to try to bring eurozone inflation down. Its main rate is now 4%, the highest level for 22 years.