UK Inflation Summer 2024

Prices in the United Kingdom have been on a rollercoaster ride. This has left consumers and policy-makers alike grappling with question: Just how swiftly are costs escalating? Will more consumers need payday loans to reach each payday?

The most recent numbers from the Office for National Statistics (ONS) show that inflation was at 2.3% in April 2024. The inflation rate has dropped from 11.1% in October 2022 to above the Bank of England’s 2% target. This has led to discussions about whether the central bank will change interest rates at its meeting in June.

Understanding the Concept of Inflation

Let’s understand what inflation means before we explore the details of the UK’s inflation situation. At its core, inflation is the gradual escalation in the cost of goods and services over time. This is similar to a bottle of milk rising from £1 to £1.05 within a year. This translates to an annual milk inflation rate of 5%.

Unfortunately consumer income / wage increases don’t match the rising cost of inflation. Potentially leading to consumers needing more access to loans, where previously they have used savings.

Measuring UK’s Inflation Rate

The ONS monitors prices for various items such as food, fuel, vinyl records, and air fryers. This helps them track inflation in the country. This virtual shopping list changes often to match what people are buying. Items are added or removed to keep it up-to-date.

The ONS closely monitors price changes for a year. They use the Consumer Prices Index (CPI) to calculate inflation. In April 2024, the Consumer Price Index (CPI) decreased because gas and electricity prices went down. This was caused by a lower energy cap.

Constant Rise in Prices

The inflation rate has gone down since late 2022. However, prices have not decreased overall. Rather, it merely indicates a deceleration in the rate at which costs are escalating. Several factors have contributed to the persistent upward trajectory of prices, despite the moderation in the inflation rate.

One of the primary culprits behind the lingering inflationary pressures is the elevated cost of energy and food. The aftermath of the COVID-19 pandemic witnessed a surge in demand for oil and gas, propelling energy prices skyward. The Russian invasion of Ukraine made the energy crisis worse by disrupting global supply chains.

The UK job market is facing a shortage of workers. This is causing difficulties and high costs for businesses trying to hire and retain skilled employees. The company passes on higher costs to customers due to the lack of workers, resulting in higher prices.

These costs being passed on to consumers has affected day to day living costs and savings, reducing each month the amount of cash remaining after bills.

The Bank of England’s Inflation-Interest Rates

The Bank of England uses interest rates to keep inflation at 2%. The central bank raised interest rates to 5.25% in response to high inflation.

The strategy is to increase borrowing costs, reducing consumers’ disposable income by affecting supply and demand principles. This potentially curbs their spending habits. Simultaneously, higher interest rates may incentivize individuals to save more, further diminishing the demand for goods and services.

But it’s important to balance interest rate hikes carefully, as raising them too much could harm the overall economy.

Homeowners may have to pay much more for their mortgages, which could cancel out the advantages of better savings rates. It will also could apply to interest rates for unsecured loan, payday loans, short term loans.

Anticipating the Next Move

The nation is eagerly anticipating the release of the next inflation numbers on June 19th. The interest rate decision on June 20th will follow this.

The Bank of England is currently facing a crucial decision. The Bank of England is facing a crucial decision. In May, the central bank decided to keep rates at 5.25% for the sixth time. This decision reflects a cautious approach to changing economic conditions.

Governor Andrew Bailey cautiously optimistic, says Bank needs more evidence of price slowdown but acknowledges things are improving. He further expressed the Bank’s expectation that inflation would converge “close” to the 2% target within the next couple of months.

Wages Keeping Pace with Inflation

During tough economic times, there is some good news: wages are increasing faster than inflation, according to official data. From February to April 2024, average pay (not including bonuses) went up by 6% compared to the previous year. The potential impact of inflation in real wages rise by an impressive 2.9%.

This good news reduces financial stress for families. It could also boost consumer confidence. This would support demand and offset the impact of high interest rates.

Inflation and Interest Rate Dynamics Abroad

The UK is not alone in its struggle against the inflationary onslaught. Other countries faced the same issues, so their central banks raised interest rates to address them.

In the Eurozone, inflation stood at 2.6% in May, a marginal uptick from 2.4% in April. The ECB lowered its main interest rate from 4% to 3.75% in June. This was the first rate cut in five years.

In the United States, inflation has been slowing down. The rate dropped to 3.3% in the year leading up to May, down from 3.4% in the previous year. The Federal Reserve kept its main interest rates steady at 5.25% to 5.5% in June. They may lower rates once in 2024, instead of the three cuts they previously expected.

Navigating the Complexities: Striking the Right Balance

The UK is dealing with challenges from inflation and interest rates. Finding the right balance is important. Policymakers need to consider the pros and cons of reducing borrowing costs. They must be cautious of causing inflation and undoing progress made so far.

Moreover, the interconnected nature of the global economy necessitates a holistic understanding of international economic trends and their potential implications for domestic policies. The Bank of England monitors events in the UK and globally to make informed decisions. These decisions aim to maintain economic stability and promote sustainable growth.

In the end, the journey towards taming inflation and restoring economic equilibrium is a complex and intricate one, requiring a delicate dance between fiscal prudence, monetary policy dexterity, and a deep appreciation of the intricate web of factors that shape the nation’s economic landscape.