With UK inflation rising to 7% in April, consumers are facing the highest rate since 1992.
Increased fuel, energy and food prices are continuing to put pressure on businesses and households across the UK.
So, why has inflation risen so drastically?
It can be drilled down to a number of factors, both socio-political and environmental, and range from fuel costs to VAT rates.
Fuel costs are the biggest contributor, with average prices of fuel rising by 12.6p between February and March – the largest rise in monthly costs since records began.
From 1 April, approximately 18 million houses also saw their fuel bills jump from £1,277 to £1,971.
VAT is going up for some businesses, too.
During the pandemic, the UK government reduce VAT rates for hospitality and tourism firms as a means of support, but since 1 April, rates have returned to the standard 20%.
Other rates increasing include air passenger duty, vehicle excise duty, postage costs, regulated rail fares, and water bills in England and Wales.
All of this, in addition to higher interest rates brought in by the Monetary Policy Committee (MPC) to slow the rise in inflation, means that purses across the country are being tightened.
What is inflation?
It’s the measurement of the rate that prices rise over a certain period of time.
For example, if inflation is 7%, it means that prices are averaging at 7% higher than they were a year ago – so a £1 pint of milk would now cost £1.07.
Inflation can rise and fall depending on supply and demand. When the COVID-19 lockdown started, there was a reduced need for fuel. As a result, the price of oil dropped, and petrol became cheaper. This contributed to a fall in the UK inflation rate.
The MPC has a target inflation rate of 2% which is considered healthily low and stable as it allows prices to increase around the same rate as wages – keeping the cost of living affordable.
The Office for National Statistics (ONS) works out the inflation by looking at the prices of everyday items known as the ‘basket of goods’ which is consistently updated to reflect social trends and moods.
Will it continue to rise?
In the short-term, probably.
It’s expected that the war in Ukraine will continue to push inflation to around 8.7% in Q4 of 2022 – the highest point since 1982 and pushing costs above even higher.
The Bank of England has also stated that inflation could hit double digits if the energy price cap goes up again in October.
What’s the issue with wages?
Basically put, average pay increases aren’t keeping up with inflation. Figures shown by the Office for National Statistics (ONS) shows that, while wages rose by 3.8% between November 2021 and January 2022, the rise in inflation means regular pay actually fell by 1% when compared to the previous year.
Is there anything that can be done?
Raising interest rates is the typical response to rising inflation, and this has been done three times in the last few months.
While this could benefit savers, some people with mortgages will see increased monthly repayments.
When borrowing is more expensive, people will have less money to spend. This means that they’ll buy fewer things and prices will stop increasing at such a rapid rate.
However, with inflation currently being catalysed by external factors like the war in Ukraine and global energy prices, increasing interest rates on a regular basis may not be the solution businesses and households need.