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UK inflation rate: How quickly are prices rising? UK inflation rate: How quickly are prices rising?
(30 days later)
Prices in the UK went up by 2.5% in the 12 months to December. Prices in the UK rose by 2.5% in the 12 months to December, a slightly smaller increase than in November, but still above the Bank of England's target.
It means inflation has been above the Bank of England's target for three months in a row. The Bank moves interest rates up and down to try to keep inflation at 2%, and has cut three times since August 2024.
The Bank moves interest rates up and down to try to keep inflation at 2%, and cut them twice in 2024, taking rates to 4.75%. Announcing the latest cut, the Bank warned that it expected inflation to rise again throughout 2025.
What is inflation?What is inflation?
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 virtual "basket of goods" is regularly updated to reflect shopping trends, with vinyl records and air fryers added in 2024, and hand sanitiser removed.This virtual "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 monitors price changes over the previous 12 months to calculate inflation.The ONS monitors price changes over the previous 12 months to calculate inflation.
The main inflation measure is called the Consumer Prices Index (CPI), external, and the latest figure is published every month.The main inflation measure is called the Consumer Prices Index (CPI), external, and the latest figure is published every month.
CPI was 2.5% in the year to December 2024, down from 2.6% in the 12 months to November. It marked the first fall in the inflation rate for three months. CPI was 2.5% in the year to December 2024, down from 2.6% in the 12 months to November. It was the first fall in the inflation rate for three months.
This was largely as a result of hotel prices falling, and tobacco costs increasing by less than in December 2023. This was largely as a result of a drop in hotel prices, and tobacco costs increasing by less than in December 2023.
Why are prices still rising?Why are prices still rising?
Inflation has fallen significantly since it hit 11.1% in October 2022, which was the highest rate for 40 years. Inflation has fallen significantly since hitting 11.1% in October 2022, which was the highest rate for 40 years.
However, that doesn't mean prices are falling - just that they are rising less quickly.However, that doesn't mean prices are falling - just that they are rising less quickly.
Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.
It then remained well above the 2% target partly because of high food prices. It then remained well above the 2% target partly because of higher food prices.
UK inflation rise - what does it mean for me?
Why does putting up interest rates help to lower inflation?Why does putting up interest rates help to lower inflation?
When inflation was well above its 2% target, the Bank of England increased interest rates to 5.25%, a 16-year high.When inflation was well above its 2% target, the Bank of England increased interest rates to 5.25%, a 16-year high.
The idea is that if you make borrowing more expensive, people have less money to spend. People may also be encouraged to save more.The idea is that if you make borrowing more expensive, people have less money to spend. People may also be encouraged to save more.
In turn, this reduces demand for goods and slows price rises.In turn, this reduces demand for goods and slows price rises.
But it is a balancing act - increasing borrowing costs risks harming the economy.But it is a balancing act - increasing borrowing costs risks harming the economy.
For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.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.Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.
What has happened to UK interest rates? What is happening to UK interest rates?
The Bank of England cut rates twice in 2024 - to 5% in August, and again to 4.75% in November. The Bank of England cut rates to 5% in August 2024, to 4.75% in November and again to 4.5% in February.
As expected, it held rates at 4.75% at its December meeting.
The Bank also considers other measures, external, such as "core inflation" when deciding whether and how to change rates.The Bank also considers other measures, external, such as "core inflation" when deciding whether and how to change rates.
Core inflation doesn't include food or energy prices because they tend to be very volatile, so can be a better indication of longer term trends. The measure was 3.2% in December, down from 3.5% in the year to November. Core inflation doesn't include food or energy prices because they tend to be very volatile, so can be a better indication of longer term trends.
After the Budget at the end of October, the Bank predicted that the policies it contained - including an increase in National Insurance Contributions paid by employers - would lift inflation slightly as businesses passed on their increased costs through higher prices. This was 3.2% in December, down from 3.5% in the year to November.
Announcing the November rate decision, Mr Bailey said the path for rates would likely be "downward from here" but warned cuts would be gradual. After the October Budget, the Bank predicted that the policies it contained - including an increase in National Insurance Contributions paid by employers - would lift inflation slightly as businesses passed on their increased costs through higher prices.
After the December meeting, he said "a gradual approach to future interest rate cuts remains right", but added "with the heightened uncertainty in the economy, we can't commit to when or by how much we will cut rates in the coming year." In February, governor Andrew Bailey warned that the Bank's approach to future cuts would be "gradual and careful" because of increased economic uncertainty.
The next interest rate decision is on Thursday 6 February. The Bank expects inflation to spike at 3.7% between July and September 2025 due to higher energy prices, water bills and bus fares.
It then thinks inflation will drop back towards the 2% target towards the end of 2027, having previously predicted this would happen earlier in the year.
The next interest rate announcement is on Thursday 20 March.
Will UK interest rate cut make my mortgage cheaper?Will UK interest rate cut make my mortgage cheaper?
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Are wages keeping up with inflation?Are wages keeping up with inflation?
The latest official quarterly figures, external show that regular pay grew more quickly than expected between August and October. The latest official figures, external show that regular pay grew more quickly than expected between September and November.
Average annual growth in pay (excluding bonuses) during the three-month period was 5.2%, up from 4.8% between July and September.Average annual growth in pay (excluding bonuses) during the three-month period was 5.2%, up from 4.8% between July and September.
This was the first increase for more than a year, and means wages are growing significantly more quickly than inflation. After taking CPI into account, wages grew by 3.4%.
Private sector earnings increased by more than public sector pay.
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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?
The inflation rate for countries using the euro was 2.4% in December 2024, up from 2.2% in November. The US and EU countries have also been trying to limit price increases.
In June, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first fall in five years. The inflation rate for countries using the euro was 2.5% in January 2025, up from 2.4% in December.
It has since cut rates three times: to 3.5% in September, to 3.25% in October and to 3% in December, external. In June 2024, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first fall in five years.
US inflation rose to 2.9% in the year to December 2024, as energy and egg prices surged. It has since cut rates four times: to 3.5% in September, to 3.25% in October, to 3% in December and 2.75% in January., external
At its September meeting, the US central bank lowered rates for the first time in four years, cutting its key lending rate by 0.5 percentage points to between 4.75% and 5%. US inflation rose to 3% in the year to January 2025, external, up slightly from 2.9% in the year to December 2024, and well above the US central bank's 2% target.
At its September meeting, the Federal Reserve lowered rates for the first time in four years, cutting its key lending rate by 0.5 percentage points to between 4.75% and 5%.
The cut was larger than many analysts had predicted.The cut was larger than many analysts had predicted.
In November, the Federal Reserve announced a further cut, taking the key rate to between 4.5% and 4.75%. The Fed cut rates again in November and December, taking the target range to between 4.25% to 4.5%.
Rates fell again in December, taking the target range to between 4.25% to 4.5%. The Fed is widely expected to keep its key rate, which now stands at about 4.3%, unchanged at its meeting in January. It held rates in January, and signalled they were not likely to change in the near future.