UK inflation exceeded expectations, reaching 3.6% in the 12 months up to June. Most analysts had predicted it to remain at 3.4% or slightly increase to 3.5%. This marks the highest inflation rate in nearly 18 months. The Office for National Statistics (ONS) attributed this rise primarily to increased food prices and less significant declines in fuel costs compared to the previous year.
Inflation ideally should be around 2%, and the Bank of England aims to maintain this level by adjusting its base interest rate, currently set at 4.25%. The upcoming Bank of England meeting on August 7 will determine whether to maintain, decrease, or raise the interest rate. Core inflation, which excludes volatile items like energy, food, alcohol, and tobacco, rose from 3.5% to 3.7%.
Richard Hays, Acting Chief Economist at the ONS, noted that inflation rose in June due to minimal decreases in motor fuel prices compared to the previous year. Food price inflation has been on the rise for the third consecutive month, reaching its highest annual rate since February of the prior year.
Chancellor Rachel Reeves acknowledged the ongoing struggles of working people with living costs. Measures already implemented include an increased national minimum wage for three million workers, free breakfast clubs in primary schools, and extending the £3 bus fare cap. Reeves emphasized the commitment to the Plan for Change to enhance people’s financial well-being.
Inflation reflects changes in the prices of goods and services over time, measured through the Consumer Price Index (CPI). The ONS calculates inflation based on a basket of goods and services reflecting consumer spending habits. The main CPI figure serves as an average indicator, although individual prices may vary. Lower inflation does not signify price stagnation but rather a slower rate of price increase.
The Bank of England raised interest rates gradually over nearly two years to curb inflation towards the 2% target. Interest rates influence borrowing costs, affecting consumer spending. Higher rates increase borrowing expenses, impacting discretionary spending and reducing demand, eventually leading to lower prices and inflation. However, higher rates have strained households by elevating mortgage payments. The base rate, currently at 4.25%, peaked at 5.25% in August 2023 before being reduced four times.
Inflation surged in 2021, peaking at 11.1% in October 2022, largely due to escalating energy and food prices. The post-Covid energy demand surge exacerbated by the Ukrainian conflict further drove up costs. The conflict also contributed to higher food prices due to increased expenses for fertilizers and animal feed.
After hitting a three-year low of 1.7% in September last year, inflation began to climb again in October, reflecting ongoing economic challenges and global events impacting prices.