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    What is the UK inflation rate and why is the cost of living rising?


    The cost of living is rising at the fastest rate in nearly 40 years, driven primarily by the rising costs of food and fossil fuels.

    Prices in August were up 9.9% from 12 months ago.

    However, inflation is unlikely to peak as previously forecast following the government’s announcement of the energy bill.

    What is inflation?

    Inflation is the increase in the price of something over time.

    For example, if the price of a bottle of milk is £1 and it has gone up by 5p compared to a year ago, then the rate of inflation for milk is 5%.

    Each month a figure is published estimating how much the overall price has risen – currently it is 9.9%.

    Why are prices rising so fast?

    Bank of England Governor Andrew Bailey has said that “the Russian shock is now the biggest factor in UK inflation.” But economists agree that there are many factors, including

    Rapidly rising energy costs due to high oil and gas prices. bills will rise further in October, but not by as much as previously planned
    Higher gasoline and diesel prices, partly due to the war in Ukraine pushing up the cost of crude oil Prices have recently eased from record levels, but are expected to remain high
    Higher food prices, as the war in Ukraine squeezes food production and costs
    The cost of used vehicles has also risen sharply
    Significantly higher costs for raw materials, household goods and furniture, and the hospitality industry (including restaurants and hotels)
    Higher interest rates have made mortgage payments more expensive for some homeowners
    Not all prices behave in the same way. Costs for some other goods and services increased only slightly or remained the same.

    What’s happening to wages?

    Many people’s pay raises have not kept pace with price increases.

    In the three months ending July 2022, the average wage, excluding bonuses, rose by 5.2 percent.

    But when inflation is taken into account, the real value of that wage actually fell by 2.8 percent.

    Unions say wages should reflect the cost of living – but the government believes this could push up inflation.

    Who measures the UK’s inflation rate?

    To produce inflation data, the Office for National Statistics tracks the prices of hundreds of everyday items. This is known as the “basket of goods”.

    The basket is constantly being updated. This year canned beans and sports bras have been added, reflecting a growing interest in plant-based diets and exercise.

    Each month’s inflation data shows how much these prices have risen since the same day last year. This is called the Consumer Price Index (CPI).

    What’s happening in other countries?

    Other countries are also experiencing a cost-of-living crunch.

    Many of the reasons are the same: increased energy costs, shortages of goods and materials, and the impact of the new crown epidemic.

    The Office for National Statistics says inflation in the U.K. is similar to the EU average.

    Meanwhile, in the United States, prices rose 8.3 percent in the 12 months to August, above economists’ expectations of 8.1 percent.

    When will inflation come down?

    Inflation is expected to peak at 14% this fall and as high as 18% next year.

    But there are some encouraging signs that may not happen. Oil and food prices have already fallen back from the highs seen after Putin’s invasion of Ukraine.

    The U.K. government’s plan to limit the rise in energy costs also means prices will rise more slowly than expected.

    Investment bank Goldman Sachs now says inflation could peak at 10.8 percent in October, slowing to 2.4 percent by December 2023.

    Lower inflation doesn’t mean prices will fall. It just means they will stop rising at the faster rate they have recently.

    What can be done to tackle inflation?

    The Bank of England’s traditional response to rising inflation is to raise interest rates. This can encourage people to save, but means that some people with mortgages see their monthly payments increase.

    Raising interest rates also makes borrowing more expensive, and – one hopes – people can spend less money. As a result, they will buy fewer things and prices will stop rising so fast.

    However, there are limits to the effectiveness of UK interest rate rises in slowing inflation when it is caused by factors such as rising global energy prices.

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