According to the Bank of England, recent increases in energy prices, which are anticipated to be three times greater than they were a year ago, will push inflation even higher, to 13%. People’s finances are being squeezed as a result of the rise in living expenses as incomes are not keeping up.
Why are costs escalating so quickly?
Andrew Bailey, governor of the Bank of England, stated that the Russian shock is now the major driver of UK inflation. However, economists concur that there are a number of them, including:
- Increasing oil and gas prices have led to a sharp increase in energy costs. When the price cap is again reviewed in October, it is anticipated to rise significantly once more.
- Prices for gas and fuel have increased in part due to the cost of crude oil soaring due to the conflict in Ukraine. Although prices have dropped from their peaks, they are still anticipated to stay high.
- Food expenses are rising as a result of the conflict in Ukraine.
- The price of used cars has also increased significantly.
- There are considerable price rises for furniture, household products, and raw materials, as well as for the hospitality industry, which includes restaurants and hotels.
- Rising interest rates are making some homeowners’ mortgage payments more expensive.
Prices don’t all operate in the same manner. Some other goods and services have remained the same in price or only slightly increased.
What is the state of wages?
Many people’s pay increases aren’t keeping up with the rate of inflation.
The average wage increased by 4.7% in the year to June 2022, excluding bonuses.
However, when you adjust for inflation, that pay’s real worth actually decreased by 3% from one year prior.
When adjusted for inflation, total compensation, including bonuses, decreased by 2.5%.
While the government claims this could drive inflation even higher, unions contend that pay should reflect the cost of living.
Who determines the inflation rate in the UK?
The ONS monitors the prices of hundreds of commonplace items in order to calculate an inflation rate.The basket of goods is what this is called.
The basket is changed frequently. This year, tinned beans and sports bras were added in response to the growing popularity of plant-based diets and physical activity.
The inflation rate for each month demonstrates how much these costs have increased since the same time last year. This is referred to as the Consumer Prices Index (CPI).
What is going on in other nations?
The cost of living is rising in other nations as well.
An increase in energy prices, a lack of supplies of commodities and resources, and the effects of COVID are a few of the same causes.
According to the ONS, UK inflation is comparable to the average for the EU.
The most current estimate of annual inflation in the eurozone was at 8.6%.
According to the US Labor Department, inflation in the US reached 9.1% in the year that ended in June, which is a 40-year high.
When will inflation start to decline?
The Bank of England claims that the current high rates of inflation are not expected to endure, despite anticipating greater inflation in the autumn.
Inflation is expected to reach its maximum this winter at 13.1% before dropping to 2% in around two years.
But not all economists share this conviction. In the past, when inflation rose above 9%, the recovery process took years rather than months.
What steps can be taken to combat inflation?
The Bank of England has historically increased interest rates in reaction to growing inflation. While this may encourage saving, it also increases some homeowners’ monthly mortgage payments.
Raising interest rates increases borrowing costs and, it is hoped, reduces consumer spending. They will buy fewer things as a result, which will slow the rate of price inflation.
But there is a limit to how effectively UK interest rate increases can curb inflation when it is brought on by factors like rising energy costs globally.