The information in this post is accurate as of the 26th September 2022 and is updated regularly.

Inflation in the UK is currently at 9.90%. The annual inflation rate is the highest yet since 1982, and it’s at a much higher rate than analytics were predicting. As prices of food and essentials continue to rise, Brits are already experiencing a substantial cost of living crisis.

The biggest price pressure overall came from fuel, followed by the skyrocketing prices of food. Specifically, the biggest contribution to the inflation rate between June and July 2022 was the rising costs of food and drink. In addition, the essentials such as bread, milk, eggs and cheese having a particularly high impact, and highest rates since 2009. And of course, the prices of homes and housing utilities, which have been increasing swiftly over the years.

But what is “inflation” and how is it calculated?

Inflation measures how much more expensive general goods and services have become in a set period of time. Every month, the Office of National Statistics checks the prices of things that people buy. They record the cost of over 700 things, such as food items, petrol, cars and holidays. They will compare the prices of those things now to what they were a year ago. This is how inflation is calculated. It is the change of prices and how much they have increased in %.

CPI and RPI Explained

There are two ways to help measure inflation: Consumer Price Index (CPI) and Retail Price Index (RPI).

CPI measures the average prices of hundreds of items we frequently spend money on. This includes everyday items such as clothing, food, fuel, bedding, footwear etc. However, it doesn’t include housing costs.

An RPI however, calculates the prices of everyday items mentioned above including housing costs. These include rent, mortgage payments and council tax.

Both, the CPI and RPI indicate the significant changes in the prices of goods and services compared to the base year’s standard costs. CPI is considered a lead indicator for the calculation of inflation. Therefore, CPI has more relevance than RPI.

The Target

The Bank of England follows a monetary policy, which affects the rate of inflation. Low and stable inflation is good for the economy, and makes it much easier to plan for the future.

The current inflation rate in the UK is 9.90%, which is nowhere near the 2% target. Most economists did not expect it to hit double digits yet, and it is estimated to peak at around 11% this winter. High inflation rates mean businesses may find it hard to set the right prices, and people may find it a lot more difficult to budget.

Why are prices continuing to rise?

There are many reasons that add to the ongoing rising costs:

• Energy and gas bills, which are expected to significantly rise again this winter. Factors that contribute to this include the demand and supply. Due to very cold winters in Europe, global supplies and gas levels are a lot lower than normal.
• Fuel prices, which have also peaked this year, due to the rising cost of oil caused by Russia’s invasion of Ukraine. Unfortunately, petrol prices are still expected to stay high.
• Food prices. There are several reasons why they have continued to rise, including the pandemic disruption, as well as the war in Ukraine. The war has caused some serious challenges for Ukraine to export wheat, meaning the world is facing a massive shortage, causing higher production costs.
• Higher interest rates since the Bank of England base rate keeps increasing. Mortgage Payments as well as rent and utility bills have all significantly jumped, putting smaller income households in an uncomfortable financial position.

The Bank of England base rate has a huge impact on how much we are spending, and how much we are paying to borrow. Rising interest rates should bring down inflation, and is estimated to take one or two years before we notice a difference.

The Bank of England Base Rate and what it means

The base rate is an important interest rate set by the Bank of England. As of the day of publication (September 2022), the current base rate is 2.25%. The bank rate basically determines how much interest is paid to commercial banks and how much you are charged for borrowing money.

The base rate is set every month in order to try and keep inflation down. Experts warn that the Bank of England is expected to raise the base up to an emergency 4% this autumn in hopes to bring it back to its 2% target.

The overall purpose of the base rate increase is to tackle inflation. This should encourage people to save money and spend less, and as a result, prices should slowly decrease. If prices start going back down, the inflation rate should drop with them.

When will inflation go down?

The good news is that the Bank of England is expecting inflation to fall in 2023. It is predicted that the prices of energy and imported goods are “unlikely to rise as rapidly as they have recently”.

The Bank of England has also speculated that inflation will be closer to its 2% target rate in around two years, after peaking this winter. This is a speculation based on how long it should take for the increased base rate to noticeably make a difference. Ultimately, this means there is a small light at the end of the tunnel for those who are currently struggling.

Cost of living and its Impact

The cost of living has been rising steadily in the UK since early 2021. It is a period where the prices of essential goods began increasing faster than household income. There are plenty of factors that add up to the cause of the crisis, such as inflation, the COVID-19 pandemic, the war in Ukraine and supply shortages.

Although most of the reasons for the crisis are caused by global issues, the UK was reported to be one of the most affected among the world’s advanced economies. The local factors that have a huge impact on the crisis include labour shortages caused by Brexit and additional taxes on households. It is also worth mentioning that wages are not climbing anywhere near as fast as the cost of basic necessities.

The Office of National Statistics has also found that 91% of adults in Great Britain have reported an increase in their cost of living. Households with lower incomes are much more affected, due to spending a bigger proportion of their money on energy, bills and food.

What is the government doing to help?

As reported by the UK parliament, measures to support households during the crisis are estimated at £37 billion. These include:

• £400 discount on energy bills this winter for all households.
• £650 payment in two instalments for those receiving selected benefits.
• £300 additional payment for pensioners and £150 to those on disability benefits.
• £150 council tax rebate for households in tax bands A-D.
• 5p cut fuel duty, as introduced by Mr Sunak in March 2022.
• £1billion household support fund, for those who are not eligible for other kinds of help but need the support.
• An increase of the National Living Wage (NLW) by 6.6%, meaning full-time workers aged 23 and over now earn £9.50 per hour.

These are just a few of the ways in which the government is supporting Brits during the cost of living crisis. To read more, head over to GOV.uk.

Alternatively, watch our video to find out if you could be eligible for financial support:

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