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Employment

Why is inflation so high in the UK?

Inflation remains at high levels. Here’s all you need to know about why, how is it calculated, and what the government can do about it

You have probably heard the word “inflation” floating around for a while now – more so in the last year because of the cost of living crisis. 

But what does it actually mean and how does it impact your life? 

Inflation is a slightly technical term which refers to the rate prices are rising. The higher the rate, the faster your bills increase. 

If you’ve noticed your shopping basket getting more expensive and your household bills soaring, that’s because inflation has been high for some months. 

New data from the Office for National Statistics (ONS) shows inflation is falling – down to 10.5 per cent in December from 10.7 per cent in November and 11.1 per cent in October

But this does not mean prices are going to fall. Prices are still rising rapidly – they’re just rising at a slightly slower rate than they were in previous months. 

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Inflation impacts people in different ways and it’s hitting the poorest people the hardest.

The Big Issue previously spoke to Jack Leslie, senior economist at think tank the Resolution Foundation, to better understand what inflation is, what it means to the everyday lives of people in Britain, and what the government should be doing about it.

Here’s everything you need to know about inflation and what it means for you. 

What is inflation and how is it calculated?

The inflation rate is a measure of how prices change over time. If you’ve been noticing that the cost of a bunch of bananas or a pack of loo-roll has increased, that’s because of inflation, and the inflation rate is a measure of how much, and how quickly, these prices are rising. 

The inflation rate is based on how much prices have risen over the course of 12 months. So the inflation rate of 10.5 per cent in December 2022 means prices have risen by 10.5 per cent on average in comparison to what they were in December 2021.

“The Office for National Statistics sends out a whole load of people to shops, and they go and record the prices of a representative load of products, for example a loaf of white bread,” explains Leslie. “This is done across the country.” 

There are multiple ways that inflation is calculated. The consumer price index is the government’s preferred way of measuring inflation as it takes in costs of everyday goods. But there is also the retail price index which is more influenced by house prices and generally produces a higher number. 

To calculate the consumer price index, the ONS looks at around 180,000 prices of 700 commonly purchased items each month. This year, doughnuts, coal and men’s suits were removed, while sports bras, pet collars, meat-free sausages and antibacterial surface wipes were added. 

After these hundreds of thousands of prices have been collected, these numbers are all put together to find an average.

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What is the rate of inflation in 2023?

The current rate of inflation is 10.5 per cent, according to ONS data released in January. This is down from 10.7 per cent in November and 11.1 per cent in January. 

It was driven mainly by the rising prices of food and non-alcoholic beverages, as well as restaurants and hotels. 

Food prices are still soaring rapidly. Food and non-alcoholic beverage prices rose by 16.9 per cent in the 12 months to December 2022, up from 16.5 per cent in November.

The food inflation rate is the highest seen since 1977, when it reached 17.6 per cent. 

The largest upward effect came from milk, cheese and eggs, where prices overall rose 4.1 per cent between November and December 2022.

If you want to see just how much more expensive your shopping basket is going to be as a result of inflation, you could use a price comparison website like Trolley

It has a grocery price index with data showing how much all your basic supermarket items have increased in recent months. 

The annual rate for restaurants and hotels was 11.4 per cent in December 2022, up from 10.2 per cent in November.

The overall inflation rate eased in December mainly because of transport (particularly motor fuels), clothing and footwear, and recreation and culture.

The inflation for transport was 6.9 per cent in December 2022, down from a peak of 15.2 per cent in June 2022, and the lowest rate since May 2021.

Is inflation the same for everyone?

Prices are rising even faster for low-income households

This is because the  costs of essentials are soaring at higher rates, and low-income families typically spend a greater proportion of their income on these items. 

Energy, food, and drink tends to reflect a greater proportion of low-income households’ spending, with around 15.2 per cent of total expenditure on these categories for low-income groups and 10.4 per cent for high-income groups.

Rachelle Earwaker, senior economist for the Joseph Rowntree Foundation, said: “Every day sees still more stories of people selling their possessions, or borrowing money at punishing interest rates, just to afford these essentials.” 

Who benefits from inflation?

Wages are rising, just not enough to keep up with the rate of inflation. Almost everyone will see their income slashed in real terms this year and next – except for the wealthiest 5 per cent, according to recent research from the Resolution Foundation. 

The wealthiest are on course to see their incomes rise by 4 per cent between 2021-2022 and 2023-2024. Rising prices lead to high interest rates – so people with lots of savings, investment and unearned incomes will see a nice boost to their bank balance.

Having said that, higher interest rates might also be associated with falling asset prices, so even the richest could see a fall in their wealth. 

What are the causes of inflation?

Inflation is caused by several factors – but essentially, it occurs when demand outstrips supply. 

The gradual ending of Covid restrictions has meant that economies around the world are trading more than in recent years. 

Where during the pandemic  many shops were shut and manufacturers halted production of goods, people have started buying things again. This has put strains on supply chains, and pushed up the price for items that are more in demand than they were when people were confined to their homes.

“We’ve seen energy prices around the world rise. They were rising beforehand but this has been calcified by the Russian invasion of Ukraine,” Leslie said.

Food prices have risen as vital supplies of things like wheat have been held up in war-torn Ukraine.

“Globally the fact that energy prices have gone up, is clearly not the government’s fault”, says Leslie. “What is the government’s fault is failing to protect families from the impacts of inflation.” 

How long will UK inflation stay this high?

Inflation has started to fall, thankfully, but prices are still rising rapidly. The Bank of England has predicted inflation will fall sharply from the middle of next year and reach the target of 2 per cent in two years’ time. 

This is because the price of energy isn’t expected to rise quite so quickly, partly helped by the government’s energy price cap. Energy bills will increase in April to £3,000 a year for the average household, which is an increase of £500 on their current rate. 

Some of the production difficulties businesses have faced are starting to ease as we come out of the pandemic, meaning the cost of imported goods shouldn’t rise so highly. The Bank of England also expects there to be less demand for goods and services in the UK.

But we still have a long way to go, and the Resolution Foundation predicts that we’re only halfway through the cost of living crisis. 

The cost of living crisis should ease in 2024, but real wages are not expected to return to levels seen in the first quarter of 2022 until the end of 2027, according to the think tank’s forecasts. The experts say people’s real-term incomes are set to be below their pre-pandemic level even in 2027-28.

How much does my pay need to rise to keep up with inflation? 

An annual pay rise at or below the current rate of inflation is, in real terms, a pay cut. So you might wish to request a percentage rise to match inflation.

For every £100 you earned last year, you would have to earn £109 this year for your money to have the same value, according to the Office for National Statistics’ own calculations. You can use this calculator to find out how much of a pay rise you should ask for if you think it should rise to match inflation. Read more about how much your pay should rise to keep in line with inflation here. 

What could the government do to get inflation under control?

Prime minister Rishi Sunak recently promised to halve the rate of inflation this year, though critics were quick to point out that the Office for Budget Responsibility was already predicting inflation will fall to 3.8 per cent by the end of 2023.

There’s relatively little the government can do to bring down the rate of inflation, says Leslie.

“But there’s a lot the government can do to protect those families worse affected,” he adds.

“The government can be targeting support to families who are going to face material impact on their living standards. If a family was only just getting by before this increase to inflation, there’s now nowhere for them to cut back.” They will be forced into “turning off the heating, not being able to put three meals on the table.”

“The government could also look at doing more to limit rises in energy bills – that’s what some other countries have done,” Leslie  continued. 

In France, state-owned energy company EDF has been forced to take a €8.4billion (£7bn) financial hit to cap household bill rises to just four per cent. Germany has passed a cut to tax on fuel for three months by 30 cents for petrol and 14 cents for diesel. 

In the Autumn Statement, Hunt and Sunak announced benefits would increase in line with inflation and there will be targeted cost of living payments for vulnerable people – but campaigners have warned that it’s not enough,

Heidi Karjalainen, a research economist at IFS, explained before the budget that increasing benefits in line with inflation would still leave their real value on course to be 6 per cent below their pre-pandemic levels. That’s equivalent to almost £500 per year for the average out-of-work claimant. 

Energy bills will rise in April, reaching an average of £3,000, more than double what they were earlier this year. Meanwhile, the government has not extended the energy rebate scheme, meaning that many will face little support in the coming months. 

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The Big Issue’s #BigFutures campaign is calling for investment in decent and affordable housing, ending the low wage economy, and millions of green jobs. The last 10 years of austerity and cuts to public services have failed to deliver better living standards for people in this country. Sign the open letter and demand a better future. 

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