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UK Inflation Rate Explained: Impact on Your Finances and Future Outlook

The rate at which prices are rising dropped to 3.9% in the year to November, down from 4.6% in October.

A big factor in the drop was a fall in petrol and diesel prices.

In a bid to curb inflation, the Bank of England increased interest rates to 5.25%, but has held rates at its last three meetings.

The rate of price increases in the UK witnessed a decline to 3.9% in November, down from October’s 4.6%, primarily attributed to a drop in petrol and diesel prices. Despite efforts by the Bank of England to curb inflation by raising interest rates to 5.25%, rates have remained unchanged in the last three meetings.

Fuel Prices and Core Factors: Understanding the Contributors to the Decline in Inflation

Explaining inflation, it is defined as the gradual increase in the cost of goods and services over time. The UK’s inflation rate is measured by the Consumer Prices Index (CPI), which recorded a larger-than-expected fall from 4.6% in October to 3.9% in November. This decline was notably influenced by cheaper petrol and diesel prices, along with a decrease in food prices, particularly bread and dairy products.

Bank of England’s Dilemma: Maintaining Rates at 5.25% Despite Inflation Easing

A subcategory known as ‘core inflation,’ excluding energy, food, alcohol, and tobacco, also saw a decrease from 5.7% in October to 5.1% in November. The Bank of England considers both CPI and core inflation when deciding on interest rates.

The surge in inflation earlier was attributed to soaring food and energy bills, driven by increased demand for oil and gas after the COVID-19 pandemic. The war in Ukraine further impacted oil and gas availability, while global food prices rose due to a reduction in grain supply. The UK faced additional challenges, including a vegetable shortage, contributing to a 45-year high in food inflation.

What does inflation mean?

Inflation is the increase in the price of something over time.

If a bottle of milk costs £1 but £1.05 12 months later, then annual milk inflation is 5%.

How is the UK’s inflation rate measured?

The Office for National Statistics (ONS) tracks the prices of hundreds of everyday items in an imaginary “basket of goods”.

The basket is regularly updated to reflect shopping trends, with the most recent changes adding frozen berries and removing alcopops.

UK inflation
UK inflation

Each month’s inflation figure shows how much these prices have risen since the same date last year.

You can calculate inflation in various ways, but the main “headline” measure is the Consumer Prices Index (CPI).

CPI was 3.9% in the year to November down from 4.6% in October. , a bigger fall than had been expected.

Economists say one important factor cheaper petrol and diesel prices.

Food prices also fell, in particular bread and dairy products, according to ONS figures.

What is ‘core inflation’?

“Core inflation” excludes the price of energy, food, alcohol and tobacco.

It was 5.1% in the year to November, down from 5.7% in October.

The Bank of England considers this number as well as CPI when deciding whether to change interest rates.

  • What a falling inflation rate means for your finances

Why had prices risen so fast?

Soaring food and energy bills helped drive inflation up.

Oil and gas were in greater demand after Covid. The war in Ukraine meant less was available from Russia, putting further pressure on prices.

The conflict also reduced the amount of grain for sale, pushing up global food prices.

This effect was compounded in the UK by a shortage of vegetables, which took food inflation to a 45-year high.

Alcohol prices in restaurants and pubs also rose.

  • How much are prices rising for you?
  • Why inflation is worse for some people than others

How does raising interest rates help to tackle inflation?

The Bank of England has a target to keep inflation at 2%, but the current rate remains almost double that.

The traditional response to rising inflation is to put up interest rates.

This makes borrowing more expensive, and means some people with mortgages see their monthly payments go up. Some saving rates also increase.

When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises.

Businesses also borrow less, making them less likely to create jobs; some may cut staff.

In August, the Bank increased interest rates for the 14th time in a row, taking the main rate to 5.25%.

It held rates at that level at its three subsequent meetings in September, November and December.

Line chart comparing the UK Consumer Price Index with the UK interest rate.
Line chart comparing the UK Consumer Price Index with the UK interest rate.

Announcing its December decision, the Bank said there was “still some way to go” to bring inflation down “all the way back to 2%”, and suggested rates were likely to remain at 5.25% for an “extended period”.

However, the larger than expected fall in the November inflation figure has raised hopes that the Bank of England could cut interest rates sooner than expected.

  • How interest rates affect you

What happens when inflation falls?

Lower inflation doesn’t mean prices drop – it means they rise less quickly.

The Bank of England had already predicted that inflation will drop to about 4.5% by the end of the year and fall further in 2024.

Bank governor Andrew Bailey said it was “crucial that we see the job through” and get price rises back to the 2% target, because people “should trust that their hard-earned money maintains its value”.

In October, the International Monetary Fund (IMF) predicted the UK would have the highest inflation rates of any G7 economy in both 2023 and 2024. As a result, it thought UK interest rates would remain relatively high until 2028.

In January 2023, Prime Minister Rishi Sunak said halving inflation by the end of 2023 was one of the government’s five key pledges. It said it had met its target in October.

  • Is Sunak keeping his five key promises?
  • Can government claim credit for fall in inflation?

Are wages keeping up with inflation?

Official figures showed that – on average – regular pay excluding bonuses rose by 7.3% in the three months to October, compared with the same period a year earlier.

That was a slight fall from the 7.7% increase seen in the previous quarter.

Although earnings were not rising as quickly as they had been before, they were outpacing inflation, so wages were growing in real terms.

Chart comparing UK wage growth with inflation (December 2023)
Chart comparing UK wage growth with inflation (December 2023)

However, unions point out that many workers have received smaller pay increases, which led to widespread strikes over pay.

The government previously argued that big pay rises could push inflation higher because companies might increase prices as a result.

  • What has happened to pay in the UK?
  • Will pay rises for doctors and teachers cause inflation?

What is happening to inflation and interest rates in Europe and the US?

Many other countries have also been experiencing a cost-of-living squeeze for similar reasons: increased energy costs, shortages of goods and materials, and the fallout from Covid.

The annual inflation rate for countries that use the euro was estimated to be 2.4% in the 12 months to November, down from 2.9% in October and 4.2% in September. That is the lowest level for more than two years.

As in the UK, the European Central Bank (ECB) has increased interest rates to try to bring rising prices under control.

On 14 September, it raised its key interest rate – the benchmark deposit rate – to 4%, a record high, but this is widely expected to be the last increase for a while.

In the US, inflation hit 3.4% over the year to December, rising from 3.1% a month earlier and driven by higher costs for housing, dining out and car insurance.

At its December meeting, the US central bank kept its key interest rate unchanged between 5.25% and 5.5% for the third time. Rates remain at their highest level for more than two decades, but cuts are expected in 2024.

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