How quickly are prices rising?

For the first time this year, prices in the UK rose: from 2 percent in the twelve months to June to 2.2 percent in July.

The Bank of England has set a target of keeping inflation at 2%. Although inflation was significantly higher, the bank raised the base rate to 5.25% to curb price increases.

At its last meeting, the bank decided to lower the interest rate to 5%.

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 a year later it only costs £1.05, the annual milk inflation rate 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 virtual “shopping cart” is updated regularly to reflect shopping trends. In 2024, vinyl records and air fryers will be added and hand sanitizer will be removed.

The ONS monitors price changes over the past 12 months to calculate inflation.

The most important inflation indicator is the consumer price index (CPI).

Latest figures show that the consumer price index (CPI) rose by 2.2% in the period to July. This is mainly due to gas and electricity prices falling less than in the previous year.

Why are prices still rising?

Inflation has fallen sharply since reaching 11.1% in October 2022, the highest level in 40 years.

However, this does not mean that prices are falling, just that they are rising less quickly.

Inflation jumped in 2022 due to greater demand for oil and gas following the Covid pandemic and a renewed rise in energy prices following Russia's invasion of Ukraine.

Partly due to high food prices, the yield remained above the Bank of England's 2% target.

Although these have now decreased, there are still significant price increases in some areas of the economy, such as the service sector – which includes everything from restaurants to hairdressers.

Due to the labor shortage, it has also become more expensive to find and retain employees.

Why does raising interest rates help reduce inflation?

The Bank of England tries to keep inflation at 2% through interest rates.

When inflation significantly exceeded this target, it raised the key interest rate to 5.25% – a 16-year high.

The idea is that if credit becomes more expensive, people will have less money to spend and it might also encourage them to save more.

This in turn reduces the demand for goods and slows the price increase.

However, this is a balancing act, as rising credit costs can harm the economy.

For example, homeowners must pay higher mortgage payments, which may cancel out cheaper savings offers.

Companies will also borrow less money and therefore create fewer new jobs. Some may cut staff and reduce their investments.

When will inflation and interest rates fall?

In August, the Bank of England cut interest rates to 5%. But Bank of England Governor Andrew Bailey warned: “We need to ensure that inflation remains low and be careful not to cut interest rates too quickly or too much.”

Although the headline consumer price index (CPI) is close to the target of 2%, the Bank also takes into account other measures of inflation, such as “core inflation,” when deciding whether to change the interest rate.

Core inflation does not take into account food and energy prices, as these tend to be very volatile, but it was 3.3 percent in July – down from 3.5 percent in June, suggesting that price increases remain a problem.

In its latest global economic forecast, the International Monetary Fund (IMF) warned that persistent inflation in countries such as the UK and the US could mean that interest rates will have to remain “high for longer”.

Are wages keeping pace with inflation?

Recent official figures show that wages are rising more slowly than they did around two years ago, but still faster than inflation.

Average salary growth (excluding bonuses) in the three-month period between April and June 2024 was 5.4%.

This is the weakest reading since the May-July period in 2022, when it was 5.2%.

What is happening with inflation and interest rates in Europe and the US?

Inflation and higher interest rates also occurred in many other countries.

At 2.2 percent, inflation in the United Kingdom is below the rate in eurozone countries, which was 2.5 percent in June, compared with 2.6 percent in May.

Despite the slight increase in inflation, the European Central Bank (ECB) cut its key interest rate from an all-time high of 4% to 3.75% in June. This was the first cut in five years.

In March, the US Federal Reserve indicated that it could cut its key interest rate three times in 2024.

In the twelve months to June, inflation in the United States fell from 3.3 percent in the year to May to three percent.

But at its June meeting, the bank left its key interest rate unchanged at 5.25 to 5.5 percent since July 2023 and signaled that it would likely make only one more cut in 2024.