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What is the UK inflation rate and how does it affect me? What is the UK inflation rate and how does it affect me?
(8 days later)
Prices in the UK are no longer rising as fast as wages, official figures show. Prices in the UK are rising at the lowest rate since September 2021.
However, inflation of 4% in January was still significantly above the Bank of England's target, meaning knock-on effects for interest rates. UK inflation was to 3.4% in the year to February - but remains above the Bank of England's 2% target, which could affect the next interest rate for borrowers and savers.
What does inflation mean?What does inflation mean?
Inflation is the increase in the price of something over time.Inflation is the increase in the price of something over time.
For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.
How is the UK's inflation rate measured?How is the UK's inflation rate measured?
The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).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 shopping trends, with vinyl records and air fryers added in 2024, and hand sanitiser taken out. This "basket of goods" is regularly updated to reflect shopping trends, with vinyl records and air fryers added in 2024, and hand sanitiser removed.
The ONS looks at price changes over the previous 12 months to calculate inflation.The ONS looks at price changes over the previous 12 months to calculate inflation.
One reason for January's 4% inflation figure was a rise in the cost of gas and electricity costs, it said.
The main inflation measure used is called the Consumer Prices Index (CPI).The main inflation measure used is called the Consumer Prices Index (CPI).
The Bank of England also looks at "core inflation" when making decisions about interest rates. One reason CPI fell to 3.4% in February was an increase in petrol and diesel costs, which offset a drop in food price inflation.
What is core inflation?
The Bank of England also considers something called "core inflation" when making decisions about interest rates.
This excludes the price of energy, food, alcohol and tobacco - which can change often - to get a closer picture of price rises.This excludes the price of energy, food, alcohol and tobacco - which can change often - to get a closer picture of price rises.
Core inflation was 5.1% in January. Core inflation was 4.5% in February.
Why are are we still seeing big price rises? Why are prices still rising?
Up to now soaring food and energy bills have been the main cause of high inflation. Soaring food and energy bills were the main causes of the UK's recent high inflation.
Oil and gas were in greater demand after Covid and prices also surged when Russia invaded Ukraine, cutting supplies. Oil and gas were in greater demand after the Covid pandemic, and prices surged again when Russia invaded Ukraine, cutting global supplies.
The conflict also reduced the amount of grain for sale, pushing up food prices.The conflict also reduced the amount of grain for sale, pushing up food prices.
It led to inflation hitting 11.1% in October 2022, the highest rate for 40 years. Inflation soared to 11.1% in October 2022, the highest rate for 40 years.
The rate has fallen since then, but lower inflation doesn't mean prices are falling - just that they are rising less quickly. The rate has fallen significantly since then, but lower inflation doesn't mean prices are falling - just that they are rising less quickly.
Most things will cost more than they did before. Most things will still cost more than they did before.
One reason for the UK's stubbornly high inflation rate is that worker shortages are pushing up the cost of hiring and retaining employees. One reason that inflation has remained high in the UK is that worker shortages have made it more expensive to find and keep staff.
Why inflation is worse for some people than othersWhy inflation is worse for some people than others
How much are prices rising for you? Try our calculatorHow much are prices rising for you? Try our calculator
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What can be done to lower inflation?What can be done to lower inflation?
The Bank of England's target is to keep inflation at 2%.The Bank of England's target is to keep inflation at 2%.
With inflation remaining much higher than that, the Bank increased interest rates to 5.25%. While inflation remained several times that level, 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 saving rates increase.The theory is that by making borrowing more expensive, people will have less money to spend. They are also encouraged to save more as saving rates increase.
In turn, this reduces demand for goods and slows price rises.In turn, this reduces demand for goods and slows price rises.
But it's a balancing act - by increasing borrowing costs there is a risk of harming the economy. But it's a balancing act - increasing borrowing costs risks harming the economy.
For example, homeowners face higher mortgage repayments, though they can get better deals on savings. For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.
Businesses also borrow less, making them less likely to create jobs. Some may cut staff and not invest. Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.
Can government claim credit for a fall in inflation?Can government claim credit for a fall in inflation?
When will inflation go down? When will inflation and interest rates go down?
The Bank of England has predicted that inflation will fall further in 2024, and has indicated it is edging towards cutting interest rates. The Bank of England says it expects inflation to keep falling in 2024, and has suggested it is edging towards cutting interest rates.
As a result, interest rates could be cut early in the summer, economists have suggested. The Bank will announce its next rate decision on Thursday 21 March, when it is widely expected to hold rates at 5.25.
But many economists are predicting a cut in early summer.
What are UK interest rates and when will they fall?
What a falling inflation rate means for your financesWhat a falling inflation rate means for your finances
Are wages keeping up with inflation?Are wages keeping up with inflation?
Wage growth is currently outpacing price rises, official figures show, but pay is not rising as quickly as it was. Wage growth is growing faster than rising prices, official figures show, but pay is not increasing as quickly as it was.
Pay, excluding bonuses, grew by 6.2% in the last three months of 2023 compared with the same period a year before. Pay, excluding bonuses, grew by 6.2% in the last three months of 2023 compared with the same period a year before. After taking inflation into account, it means pay went up by 1.9%.
Several industries, including rail, healthcare and education, have gone on strike over pay.Several industries, including rail, healthcare and education, have gone on strike over pay.
The government has argued that big pay rises could push inflation higher because companies might increase prices as a result.The government has argued that big pay rises could push inflation higher because companies might increase prices as a result.
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What is happening to inflation and interest rates in Europe and the US?What is happening to inflation and interest rates in Europe and the US?
Many other countries have also been experiencing a cost-of-living squeeze and higher interest rates.Many other countries have also been experiencing a cost-of-living squeeze and higher interest rates.
But UK inflation remains higher than in the EU and US. But even at 3.4%, UK inflation 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, down from 2.8% in January. The annual inflation rate for countries using the euro was 2.6% in February, down from 2.8% in January.
In the US, inflation hit 3.2% in February, up very slightly from 3.1% in January.In the US, inflation hit 3.2% in February, up very slightly from 3.1% in January.
Why is inflation higher in UK than other countries?Why is inflation higher in UK than other countries?
The European Central Bank raised its key interest rate to a record high 4% in September, and has left it unchanged since. The European Central Bank raised its key interest rate to a record high 4% in September, where it remains.
At its January meeting, the US central bank kept its key interest rate at between 5.25% and 5.5% for the fourth time.At its January meeting, the US central bank kept its key interest rate at between 5.25% and 5.5% for the fourth time.
Related TopicsRelated Topics
EconomicsEconomics
Personal financePersonal finance
InflationInflation
Cost of LivingCost of Living
UK economyUK economy
Bank of EnglandBank of England
PayPay