Despite hopes that it would decrease even lower, the rate at which prices are rising has marginally slowed down but still stands at a double-digit level. Food prices reached a 45-year high as a result of rising prices for bread, cereal, and chocolate. The Bank of England has raised interest rates 11 times in a row, to 4.25%, in an effort to help down costs. So, why are prices rising?
How It Is Being 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 regularly changed; the most recent additions were frozen berries and the removal of Alcopops. The inflation rate for each month demonstrates how much these costs have increased since the same time last year. Although there are several ways to calculate inflation, the Consumer Prices Index (CPI) is the most common one.
In the year to March, the CPI decreased from 10.4% in February to 10.1% most recently.
What Is Driving Inflation?
Inflation has been mostly driven by 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.
The war has also decreased the amount of grain that is accessible, increasing the price of food worldwide. Food inflation in the UK reached a 45-year high in February as a result of this effect and a lack of lettuce and other vegetables.
The cost of alcohol increased in both bars and restaurants.
Why Are Prices Rising? Pay
Many people’s pay increases aren’t keeping up with the rate of inflation. According to official statistics, the average weekly wage in the UK in January was £589, up £1 over the previous month.
The average wage increased by around £3 per month in 2022.
When inflation is taken into account, however, the average wage actually decreased by 2.4% in the three months leading up to January when compared to the same time the year prior.
Many workers have been on strike over pay because unions believe that wages should reflect the cost of living.
Large wage increases, according to the government, could raise inflation because businesses might raise their pricing as a response.
Tackling Inflation
Although the Bank of England aims to limit inflation at 2%, the actual rate is still more than five times that. 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.
Businesses may also reduce employees and create fewer employment as a result of borrowing less money. The Bank raised interest rates in March for the eleventh time in a row, bringing the benchmark rate to 4.25%.
Why Are Prices Rising? Interest Rates
The next interest rate announcement is on 11 May. But when inflation is caused by factors such as global energy prices, action from the Bank of England may not be enough to slow it down. Less inflation does not imply lower pricing. Simply put, they slow down their rate of ascent. By the end of 2023, according to the Office for Budget Responsibility (OBR), which evaluates the government’s economic objectives, inflation will return to 2.9%.
One of the government’s five main commitments, according to Prime Minister Rishi Sunak, is to cut inflation in half by the end of 2023.
