What is inflation and what is its current rate in the UK and Europe?

Latest ONS figure makes for bleak reading as Rishi Sunak under renewed pressure to help households

Joe Sommerlad
Wednesday 18 May 2022 10:08
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The Bank of England (BoE) defines inflation simply as a term used by economists to “describe the increase in prices over time”.

Rising costs in goods and services on the UK high street indicate that the value of the British pound is in decline, which in turn means a reduction in consumers’ purchasing power and therefore their quality of life, as they are discouraged from spending more than they can afford.

This in turn eats into national economic growth.

“A healthy economy needs to have a low and stable rate of inflation,” the central bank explains. “The government sets a target for how much prices overall should go up each year in the UK. That target is 2 per cent. It’s the Bank of England’s job to keep inflation at that target.

“A little bit of inflation is helpful. But high and unstable rates of inflation can be harmful. If prices are unpredictable, it is difficult for people to plan how much they can spend, save or invest.

“In extreme cases, high and volatile inflation can cause an economy to collapse. Zimbabwe is a good example. It experienced this in 2007-2009 when the price level increased by around 80 billion per cent in a single month. As a result, people simply refused to use Zimbabwean banknotes and the economy ground to a halt.”

The BoE sets monetary policy to exert control and prevent such situations arising, primarily through managing interest rates.

“Higher interest rates make it more expensive for people to borrow money and encourage them to save. That means that overall, they will tend to spend less,” the bank continues.

Cost of living: How to get help

The cost of living crisis has touched every corner of the UK, pushing families to the brink with rising food and fuel prices.

  • The Independent has asked experts to explain small ways you can stretch your money, including managing debt and obtaining items for free.
  • If you need to access a food bank, find your local council’s website using gov.uk and then use the local authority’s site to locate your nearest centre. The Trussell Trust, which runs many food banks, has a similar tool.
  • Citizens Advice provides free help to people in need. The organisation can help you find grants or benefits, or advise on rent, debt and budgeting.
  • If you are experiencing feelings of distress and isolation, or are struggling to cope, The Samaritans offers support; you can speak to someone for free over the phone, in confidence, on 116 123 (UK and ROI), email jo@samaritans.org, or visit the Samaritans website to find details of your nearest branch.

“If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.”

In Britain, the phenomenon is measured monthly by the Office for National Statistics (ONS), which checks the price of 700 typical goods and services that UK consumers regularly spend money on, from bread and milk to cars and foreign holidays.

The total price of a “basket” of such items is calculated to give us the Consumer Price Index (CPI), which is compared to its equivalent a year earlier to reveal how much the rate of inflation has risen over the past 12 months.

On Wednesday morning, the ONS released its latest figures revealing that the UK’s rate of inflation had soared to 9 per cent in the year to April, a 40-year high.

That marks a 2 per cent increase on March following an almost £700 rise in Ofgem’s energy price cap coming into effect.

Andrew Bailey, governor of the BoE, said that he and other interest rate setters at the institution felt “helpless” in the face of price growth generated overseas and imported into the UK.

The development will inevitably place renewed pressure on chancellor Rishi Sunak to announce further help for British households facing a spiralling cost of living crisis, with soaring domestic energy and fuel prices a particular cause for concern even before Russia commenced its reviled war in Ukraine in late February, exacerbating international supply problems.

Fears are also now growing about a surge in food prices, also, at least in part, a consequence of the conflict in Eastern Europe.

Responding to the latest ONS figures, Mr Sunak said the Treasury could not shelter people from global price pressures.

“Countries around the world are dealing with rising inflation. Today’s inflation numbers are driven by the energy price cap rise in April, which in turn is driven by higher global energy prices,” he said.

“We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action.”

There is a growing clamour from business groups, charities and the opposition Labour Party for an emergency budget in order to offer more support to those who are struggling most.

Rachel Reeves MP, Labour’s shadow chancellor said: “Today’s inflation data will add to the worries families already face as prices soar and pay packets are crunched.

“It makes it even more unconscionable that – while they pile taxes on working people in the midst of this crisis – the Conservatives voted last night against a windfall tax on oil and gas producer profits to cut families’ energy bills.”

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