Although the rate of price growth has slowed marginally, inflation is still very close to a 40-year high. The Bank of England responded by raising interest rates to 4%, the highest level in 14 years. We took a look at why the cost of living is rising.
Why The Cost Of Living Is Rising – How Is The Inflation Rate Measured?
The Office for National Statistics (ONS) tracks the prices of hundreds of ordinary commodities in a fictitious “basket of goods” to calculate the rate of inflation.
The basket is changed frequently. Last year, tinned beans and sports bras were included.
The inflation rate for each month demonstrates how much these costs have increased since the same time last year. There are other ways to determine inflation, but the Consumer Price Index is the primary indicator (CPI). CPI’s most recent reading in December was 10.5%, down from 10.7% in November.
Why Are Prices Rising?
One important aspect is the rising cost of energy.
As things began to return to normal after Covid, demand for oil and gas increased. In addition, because less was available from Russia due to the conflict in the Ukraine, prices were further pushed upward.
Additionally, the war has decreased the supply of grain, increasing food costs. According to the ONS, annual food inflation reached 16.8% in December.
The most significant price rises were for staples like milk, cheese, olive oil, and eggs, but prices for sugar, jam, honey, syrups, chocolate, soft drinks, and juices also increased.
Why The Cost Of Living Is Rising
One important aspect is the rising cost of energy.
As things began to return to normal after Covid, demand for oil and gas increased. In addition, because less was available from Russia due to the conflict in the Ukraine, prices were further pushed upward.
Additionally, the war has decreased the supply of grain, increasing food costs. According to the ONS, annual food inflation reached 16.8% in December.
The most significant price rises were for staples like milk, cheese, olive oil, and eggs, but prices for sugar, jam, honey, syrups, chocolate, soft drinks, and juices also increased.
The Impact Of Wages
Many people’s pay increases aren’t keeping up with the rate of inflation. That’s despite the fastest rate of pay growth in more than 20 years.
According to official data, average wages increased 6.4% between the three months ending in November 2021 and 2022, both including and excluding bonuses.
However, when accounting for inflation, average pay actually decreased.
Additionally, there was a significant difference in salary growth between those employed in the public sector (3.3%) and the private sector (7.2%).
Many workers are on strike over pay, according to unions, who believe that wages should reflect the cost of life.
Large wage increases, according to the government, could raise inflation because businesses might raise their pricing as a response.
How To Tackle Inflation
Inflation currently stands at more than five times the Bank of England’s target rate of 2%.
Interest rates have historically increased in reaction to growing inflation.
Due to the increased cost of borrowing, certain borrowers who have mortgages may experience an increase in their monthly payments. Additionally, some saving rates rise.
People buy fewer things when they have less money to spend, which decreases the demand for commodities and slows price increases.
The Bank raised interest rates in December for the tenth time in a row, bringing the benchmark rate to 4%.
When Will Inflation Lower?
Prices will not necessarily decrease if inflation declines. Simply put, they slow down their rate of ascent.
According to it, inflation reached its peak last year and would continue to decline in 2023, reaching a low of 4% by the end of the year.
Inflation will decline to 3.75% by the fourth quarter of 2023, according to the Office of Budget Responsibility (OBR), which evaluates the government’s economic objectives, which is substantially below half the present level.
One of the five major promises made by Prime Minister Rishi Sunak is to cut inflation in half by the end of 2023. But it’s unclear if he’ll make any new announcements on strategies to do this or if he’ll merely depend on past interventions.
