Why has inflation increased and what does this mean for households?

According to official figures, inflation in the UK rose slightly to 2.2 percent last month.

This means that the interest rate has risen again above the target set by the government and the Bank of England, after remaining at 2% for two months in May and June.

Here the PA news agency examines what the latest inflation data means for households and the economy.

– What is inflation?

Inflation is the term used to describe the rise in prices of goods and services. The inflation rate indicates how quickly this happens.

Inflation of 2.2% in July means that an item that cost £100 a year ago would cost £102.20 today.

This is a small increase from the inflation rate of two percent in May and June. This means that prices are rising somewhat faster than in recent months.

– Is inflation rising for everything?

No, the increase refers to the inflation of the consumer price index, which represents the entire economy.

Nevertheless, inflation has fallen in some regions.

Looking only at the service sector – such as hospitality and culture – the rate fell from 5.7% in June to 5.2%.

This means that overall prices for services still rose compared to July of the previous year, but at a slower rate than in the previous month.

– So what drove up inflation?

The main reason for this was a reduction in the impact of falling energy costs in this month's figures.

Grant Fitzner, chief economist at the ONS, said: “Inflation rose slightly in July as household energy costs fell, but less than a year ago.”

In other words, energy costs still fell compared to July of the previous year, but had less downward pressure on the inflation rate of the economy as a whole than in previous months.

– Has anything actually become cheaper?

Yes. Prices in hotels and restaurants fell between June and July, contributing to falling inflation in the services sector.

Despite the monthly decline, hotel and restaurant prices rose year-on-year. The annual inflation rate was 4.9 percent, below the June figure of 6.3 percent.

Other things continue to get more expensive. Alcohol and tobacco prices, for example, rose faster than most other goods. The inflation rate was still high at 7.2 percent in July, slightly below the 7.3 percent in June.

Inflation for food and beverages (excluding alcohol) remained stable at 1.5 percent in July, meaning they are also becoming more expensive, albeit very slowly.

Darren Jones, chief secretary to the Treasury, said the figures showed that many families “are still struggling with the cost of living”.

– What does this mean for households?

Although inflation in the services sector fell, the relatively high figure of 5.2 percent represents a larger increase in this sector than in household goods or bills.

The Resolution Foundation think tank found on Wednesday that inflation in services, such as restaurants and leisure, is hitting richer households harder.

At the same time, food and bills – the cause of the recent cost of living crisis – make up a larger share of the family budgets of poorer households.

Lalitha Try, economist at the foundation, said: “For now at least, prices for household services such as restaurants and leisure activities have been replaced by food and energy bills as the focus of price pressures.

“Keeping these price increases under control is crucial to keeping headline inflation close to target and lowering interest rates.”

– What does this mean for interest rates?

The Bank of England cut the base interest rate, which determines the cost of loans and mortgages, by a quarter of a percentage point to 5% at the beginning of August.

However, Governor Andrew Bailey said on August 1 that the bank should “ensure that inflation remains low and be careful not to cut interest rates too quickly or too much.”

Maintaining a high base interest rate is the bank's most important measure to curb inflation.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said on Wednesday: “The Bank of England is likely to remain business as usual in September, with interest rates remaining unchanged. As such, it is unlikely that the situation will change significantly for savers and borrowers.”

– What is the situation in other sectors of the economy?

The retail price index (RPI), which measures a representative group of retail goods and services, was 3.6% in July.

This figure could be significant because annual rail fare increases have so far been based on July's RPI reading.

However, last year, ticket prices were capped below the RPI rate after it stood at 9% in the month. The government has not said whether it will use that figure this year.