Inflation is increasing, and many people will be concerned about the cost-of-living crisis that is unfolding.
Inflation hit a 30-year high of 6.2 per cent in February, up from 5.5 per cent in January, and the fastest rise since 2009. The Bank of England has warned inflation could rocket to eight per cent this year as food and energy costs soar.
Wednesday’s figures from the Office for National Statistics showed the Consumer Prices Index (CPI) measure of inflation rose by an even higher rate than expected rise than expected. It is now at its highest since March 1992, when it stood at 7.1 per cent.
But what does inflation mean? Here’s everything you need to know.
What is inflation?
Inflation is a measure of how much the prices of goods and services increase over time. It is one of the most relevant economic indicators for consumers as it affects their buying power and has an impact on everything from fuel prices to mortgages, as well as things like the price of train tickets and the cost of shopping.
People usually measure inflation by comparing the cost of things today with a year ago. This average increase in prices is known as the inflation rate.
If the rate of inflation is 1 per cent, it means that prices are higher by 1 per cent on average. For example, a loaf of bread that cost you £1 a year ago will now cost you £1.01.
How is inflation measured?
In the UK, inflation is measured by the ONS, which produces three main estimates of inflation: the CPI, the Consumer Price Index Including Housing Costs (CPIH) and the Retail Price Index (RPI).
To calculate the CPI – the most commonly used figure – the ONS looks at the prices of thousands of goods and services across the UK, and compares them year-on-year.
The items used in this basket of goods and services are reviewed each year to ensure the measure of the cost of living reflects the public’s spending habits. For example, in 2019 smart speakers were added to the list of items in the basket.
How does this impact you?
Inflation is rising faster than wages are growing, so, in short, things are getting more expensive.
The ONS said increases in household and transport costs, such as electricity, gas and fuel bills, were the largest drivers in the rise of the Consumer Prices Index (CPI) measure of inflation to 6.2 per cent.
Food prices have also risen steeply, driven by rising oil costs making transport and shipping more expensive. The price of food and non-alcoholic beverages jumped 5.1 per cent in the year to February.
Other factors included a rise in costs for “a variety of recreational and cultural goods and services (principally games, toys and hobbies), and clothing and footwear”.
Energy prices have been rising globally, with the war in Ukraine sending the cost of gas soaring further. Fuel prices have hit record levels, with the cost of petrol and diesel prices rising by 20p a litre in the last month.
The cost of filling up at the petrol pump had already been rising as economies emerged from the Covid-19 pandemic, with oil prices hiked further due to the war in Ukraine.
Second-hand car costs have increased sharply, with a global computer chip shortage helping drive up prices.
Meanwhile, staff shortages have led employers to raise wages, which can also cause inflation to spike.
How can inflation be curbed?
The Bank of England has raised interest rates three times in the past few months in a bid to calm inflation rises.
Increasing interest rates is a way of reducing the amount of money in circulation in the economy, making borrowing more expensive and leaving people with less money to spend to bring prices down.
But raising interest rates means some homeowners faces an increase in mortgage repayments, which could send inflation spiralling further.
The Government could cut taxes on items that are rising quickly, such as slashing fuel duty. Mr Sunak has vowed he will “stand by hardworking families” when he delivers his mini-budget today, with the cost of living crisis hitting millions of Britons.
He said: “Look at our record, we have supported people – and our fiscal rules mean we have helped households while also investing in the economy for the longer term.”
He has already promised £12bn worth of help for energy bills in the form of a repayable rebate and a council tax discount for most households.
Mr Sunak could also remove VAT from domestic fuel in a boost to car owners and increase universal credit.
However, it is expected that he will raise national insurance as well, at the same time as the energy price cap increases.
The energy price cap is being lifted from £1,277 to £1,971, sending costs spiralling by more than 50 per cent for 22 million households.
Iceland’s managing director Richard Walker said the pressure of trying to keep supermarket prices down was “relentless” as he called for action on energy prices.
“It’s incredibly concerning. We’re hearing of some food bank users declining potatoes and root veg because they can’t afford the energy to boil them,” he told BBC Radio 4’s Today programme.