RiceriIn October 2024, UK inflation rose 2.3%, exceeding the Bank of England’s 2% target. Even though inflation has fallen from its peak of 11.1% in 2022, prices are still rising. This happened especially because of rising energy costs and food prices. The Bank of England has lowered interest rates to 4.75% in November 2024 to tackle inflation.
High borrowing costs may slow economic growth, though. Wage growth outpaces inflation, but not all sectors will be equally affected. Global inflation is easing. And the European Union and the United States have also seen similar interest rate adjustments. Managing inflation is a delicate balance for economies around the world.
UK Inflation Trends and Economic Impact
In the past few years Inflation has become a major problem for economies around the world. And the UK is no exception. In the United Kingdom, the Consumer Price Index (CPI) rose 2.3% for the year to October 2024, above the Bank of England‘s 2% target. It is considered an outstanding recovery from previous months. In the event that inflation is low. The Bank of England adjusts interest rates frequently to manage inflation and ensure economic stability. It is a tool that directly affects everything from the cost of borrowing to the cost of living.
By definition, inflation is the rate at which the prices of goods and services generally increase. As a result, the purchasing power of the currency decreases. It is important for businesses and individuals to understand the factors that affect changes in inflation. What about Thailand, England and other central banks? How do you respond? The mechanism behind it is explored. Impact on daily life Policies used to control Along with comparisons with other countries such as the European Union and the United States.
What is Inflation?
Inflation refers to the rate at which the prices of goods and services increase over a period of time. When inflation occurs, each unit of currency purchases fewer goods and services. For example, if the price of milk increases from £1 to £1.05 in one year, the milk inflation rate would be 5%. However, inflation affects the entire economy, not just individual products. Rising prices are often attributed to deliberate exploitation and economic forces that track changes in overall price levels.
Inflation is measured by monitoring the prices of a representative “shopping basket” of goods and services that reflect the spending habits of the general population. These goods include items such as food, housing, transportation, and other essentials. The most widely used measure in the UK is the Consumer Price Index (CPI), which tracks price changes for over 700 commodities and services, ranging from basic items like bread and milk to more complex expenditures such as housing and entertainment.
How is Inflation Measured in the UK?
The Office for National Statistics (ONS) is responsible for calculating inflation rates in the UK. To do this, the ONS tracks the prices of hundreds of products daily, reflecting the purchasing habits of the average consumer. These products are categorized into groups like food, travel, accommodation, and entertainment. The ONS updates its data regularly to account for shifts in consumer behavior, such as the growing popularity of oil-free fryers or the removal of products like hand sanitizer from the basket after the COVID-19 pandemic.
The Consumer Price Index compares the current prices of goods and services to their prices from the previous year. The result is expressed as a percentage, showing how much prices have increased or decreased over 12 months. For instance, a CPI of 2.3% in October 2024 means that, on average, prices rose by 2.3% compared to October 2023. Another measure, the Retail Price Index (RPI), includes housing costs such as mortgage interest payments and rent, but the CPI remains the most commonly used measure of inflation in the UK.
Why Are Prices Still Rising?
Despite inflation falling significantly from its peak of 11.1% in October 2022 — the highest level in four decades — prices continue to rise. A decrease in inflation does not mean that prices are falling; it simply indicates that the rate of increase has slowed.
Several factors contribute to rising prices, including the aftermath of the COVID-19 pandemic and geopolitical instability caused by Russia’s invasion of Ukraine. This conflict has led to significant increases in energy prices. Global demand for energy, particularly oil and gas, surged after the pandemic as economies reopened and industrial activities resumed. However, this demand coincided with supply shortages, driving prices higher.
Energy prices, including gas and electricity, have fluctuated significantly, with the UK government introducing energy price caps to protect consumers. These caps were raised in October 2024, contributing to inflationary pressures.
In addition to energy costs, food prices remain high due to inflationary pressures on supply chains and production costs. The continuous increase in the cost of living has impacted various sectors of the economy, particularly services such as dining out, personal care (e.g., haircuts), and home repairs. These persistent price increases underline why inflation remains a key economic concern.
The Role of the Bank of England and Interest Rates
One of the Bank of England’s primary tools for controlling inflation is adjusting interest rates. When inflation is high, the Bank often raises interest rates to cool the economy by making borrowing more expensive. Higher interest rates reduce consumer spending and business investment, which lowers demand for goods and services, thereby reducing inflation. Conversely, when inflation is very low or the economy enters a recession, the Bank lowers interest rates to encourage borrowing and spending, stimulating economic growth. The goal is to maintain stable inflation, generally around 2%, which is considered optimal for economic stability.
In July 2024, with inflation continuing to rise, the Bank raised interest rates to 5.25% — the highest level in 16 years — to discourage borrowing and reduce inflation. However, by November 2024, the Bank cut interest rates to 4.75% after inflation showed signs of stabilizing. The Monetary Policy Committee of the Bank of England meets regularly to assess the economic situation and adjust interest rates accordingly. These decisions are informed by factors such as the core inflation rate, which excludes volatile items like food and energy.
The Bank’s strategy is a balancing act: while higher interest rates help reduce inflation, they can also negatively impact the broader economy. For instance, increased mortgage rates raise housing costs for homeowners, reducing disposable income and consumer confidence. Businesses, too, may cut costs, including layoffs, if interest rates rise excessively.
The Impact of Interest Rate Changes
Changes in interest rates directly affect borrowers and savers. When interest rates rise, borrowing costs also increase, impacting individuals with mortgages, car loans, and credit card debt as repayments become more expensive. On the other hand, savers benefit from higher interest rates because their savings generate more returns.
However, the broader effect of rising interest rates is reduced consumer spending. With higher borrowing costs, people are less likely to take loans or make large purchases. For businesses, increased financial costs can deter investment, such as expanding operations or purchasing new equipment. This can slow economic growth and, in some cases, lead to job losses or stagnant wages.
Wage Growth and Inflation
An essential aspect of inflation is whether wages keep pace with price increases. When prices rise, workers often demand higher wages to maintain their living standards. However, if wage growth fails to match inflation, the purchasing power of workers declines.
Between July and September 2024, the UK experienced slower wage growth, with average annual wages rising by 4.8%, slightly lower than the 4.9% recorded in the previous quarter. While wage growth exceeded inflation during this period, providing some relief to workers, the gap between wages and inflation varied across sectors. Workers in low-wage or public-sector jobs often felt the impact of inflation more acutely than others.
The Global Context: Inflation and Interest Rates Around the World
The UK is not alone in facing inflationary pressures. Inflation rates have risen globally, particularly in the European Union and the United States. However, in many countries, inflation has begun to decline due to easing supply chain issues and stable energy prices.
In the eurozone, inflation was 1.8% in September 2024, down from 2.2% in August. The European Central Bank (ECB) had previously raised its key interest rate to combat inflation but began lowering rates in 2024 as economic conditions improved.
In the United States, inflation was 2.6% in October 2024, slightly up from 2.4% in September, driven primarily by rising housing and food prices. The Federal Reserve responded by implementing significant interest rate cuts in September and November 2024 to address these pressures.
Conclusion
Inflation is a complex and multifaceted issue that affects individuals, businesses, and governments. Although inflation in the UK has fallen from its peak in 2022, prices continue to rise due to factors like increasing energy costs and ongoing supply chain challenges.
As the global economy recovers from the COVID-19 pandemic and grapples with geopolitical uncertainties, inflation and interest rates remain critical in shaping the economic outlook. For consumers, understanding how rising prices and changing interest rates affect their finances is crucial for making informed decisions about spending, saving, and investing.
