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What is inflation and why is it so high?

Inflation has hit a 40-year high. We ask an economist: What is inflation, how is it calculated, and what can the government do about it?

Inflation has hit a 40-year high, reaching 9 per cent in April, which is the highest it’s been since 1982.

It further deepens the cost of living crisis, which has been steadily getting worse, with energy bills soaring after the Ofgem price cap was lifted in April.

Real-terms wages have also seen their biggest monthly fall in eight years, with pay not keeping up with inflation.

The Bank of England has warned the strain could result in a recession and surge in unemployment, and it’s hitting the poorest people the hardest, according to the Institute of Fiscal Studies.

But was this all inevitable? And how have the statisticians reached this figure?

The Big Issue 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.

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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 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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Inflation has now hit nine per cent, what does that mean?

Chancellor Rishi Sunak has warned that the next few months “will be tough” after it was revealed prices are rising at the fastest rate for 40 years, but he’s being criticised for not doing more.

Around three quarters of the rise in inflation in April came from higher electricity and gas bills, according to the Office for National Statistics (ONS).

Back in January, anti-poverty campaigner and food writer Jack Monroe highlighted the disproportionate impact of inflation on low-income families, who are being hit hardest by the cost of living crisis.

She noted that bread had increased by 29 per cent from 45p to 58p. The cost of canned spaghetti was up by 169 per cent, while the price of a bag of small apples had increased by more than half. For people already forced to rely on supermarkets’ budget options, sharp price hikes had a much larger impact on the costs of essentials than more expensive meals, cutting down people’s food budget options even further. Essentially, the cost of everyday items, aka inflation, is not being experienced equally

In response to the public’s concern – and with the cost of living crisis set to worsen in the coming months – the ONS announced it would change how it measures the everyday costs of households.

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Was record breaking inflation inevitable and whose fault is it that it keeps rising?

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

The Bank of England released updated forecasts earlier this month stating that inflation will top 10 per cent later this year.

Food prices are expected to rise as vital supplies of with food prices set to provide greater upwards pressure due to crucial supplies of things like wheat being 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.” 

What could the government do to get inflation under control?

There’s relatively little the government can do to bring down the rate of inflation, says Leslie, who predicts that inflation will continue to increase before falling relatively quickly next year.

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

“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.”

Raising benefit rates is a key factor that would help those whose standard of living has been worst hit by rising inflation, says Leslie. Benefit rates are increased every year, but this April they increased by 3.1 per cent, which is well below inflation.

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

In France, state-owned energy company EDF has been forced to take a €8.4bn (£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. 

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