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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? |
(3 days later) | |
Prices in the UK are rising at the lowest rate since September 2021. | |
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 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. |
The main inflation measure used is called the Consumer Prices Index (CPI). | The main inflation measure used is called the Consumer Prices Index (CPI). |
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 4.5% in February. | |
Why are prices still rising? | |
Soaring food and energy bills were the main causes of the UK's recent high inflation. | |
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. |
Inflation soared to 11.1% in October 2022, the highest rate for 40 years. | |
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 still cost more than they did before. | |
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 others | Why inflation is worse for some people than others |
How much are prices rising for you? Try our calculator | How much are prices rising for you? Try our calculator |
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%. |
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 - increasing borrowing costs risks harming the economy. | |
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 reduce investment. | |
Can government claim credit for a fall in inflation? | Can government claim credit for a fall in inflation? |
When will inflation and interest rates go down? | |
The Bank of England says it expects inflation to keep falling in 2024, and has suggested it is edging towards cutting interest rates. | |
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 finances | What a falling inflation rate means for your finances |
Are wages keeping up with inflation? | Are wages keeping up with inflation? |
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. 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. |
Five tips when asking for a pay rise | |
How to get a job: Six expert tips for finding work | |
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 even at 3.4%, UK inflation remains higher than in the EU and US. | |
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, 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 Topics | Related Topics |
Economics | Economics |
Personal finance | Personal finance |
Inflation | Inflation |
Cost of Living | Cost of Living |
UK economy | UK economy |
Bank of England | Bank of England |
Pay | Pay |