What is the inflation rate in the UK and how does it affect me?

by MMC
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In the UK, prices are no longer rising as fast as wages, according to official figures.

However, inflation of 4% in January was still significantly above the Bank of England’s target, impacting interest rates.

What does inflation mean?

Inflation is the increase in the price of something over time.

For example, if a bottle of milk costs £1 but costs £1.05 a year later, annual milk inflation is 5%.

How is the inflation rate measured in the UK?

The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).

This “basket of goods” is regularly updated to reflect purchasing trends, with vinyl records and air fryers added in 2024 and hand sanitizer removed.

The ONS looks at price changes over the previous 12 months to calculate inflation.

One of the reasons for the 4% inflation figure in January is the rise in gas and electricity prices, according to the press release.

The Bank of England also takes “core inflation” into account when making decisions about interest rates.

This excludes prices for energy, food, alcohol and tobacco – which can change often – in order to get a clearer idea of ​​price increases.

Core inflation was 5.1% in January.

Why are we still seeing sharp price increases?

Until now, skyrocketing food and energy bills have been the main cause of high inflation.

Oil and gas were in higher demand post-Covid and prices also spiked when Russia invaded Ukraine, reducing supplies.

The conflict has also reduced the amount of grain for sale, driving up food prices.

This led inflation to reach 11.1% in October 2022, the highest rate in 40 years.

The rate has since fallen, but lower inflation does not mean prices are falling, just that they are rising less quickly.

Most things will cost more than before.

What can be done to reduce inflation?

The Bank of England’s aim is to keep inflation at 2%.

With inflation remaining much higher than that, the Bank increased interest rates to 5.25%.

The theory is that by making borrowing more expensive, people will have less money to spend. They are also encouraged to save more as savings rates increase.

In turn, this reduces demand for goods and slows price increases.

But it’s a balancing act: raising borrowing costs risks harming the economy.

For example, homeowners face higher mortgage payments even though they can get better deals on savings.

Businesses also borrow less, making them less likely to create jobs. Some may downsize and not invest.

When will inflation fall?

Do salaries keep up with inflation?

Wage growth currently exceeds price growth, official figures showbut wages are not increasing as quickly as before.

Salaries, excluding bonuses, increased by 6.2% in the last three months of 2023 compared to the same period a year earlier.

Several sectors, including railways, health and education, went on strike for wages.

The government has argued that large wage increases could drive up inflation, as businesses could raise prices as a result.

What is happening to inflation and interest rates in Europe and the United States?

Many other countries have also faced rising costs of living and rising interest rates.

But inflation in the UK remains higher than in the EU and US.

The annual inflation rate for countries using the euro is expected to be 2.6% in February, up from 2.8% in January.

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