UK inflation exceeded expectations by reaching 3.6% in the 12 months leading up to June, surpassing the anticipated 3.4% or slight increase to 3.5%. This marks the highest level of inflation in nearly 18 months, attributed to elevated food prices and less significant declines in fuel prices compared to the previous year, according to the Office for National Statistics (ONS).
The Bank of England aims to maintain inflation around 2% by adjusting the base interest rate, currently set at 4.25%. The upcoming Bank of England meeting on August 7 will determine whether to retain, reduce, or raise the interest rate. Core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, rose from 3.5% to 3.7%.
Richard Hays, Acting Chief Economist at the ONS, stated that the uptick in inflation in June was primarily driven by minimal decreases in motor fuel prices compared to the significant decline a year ago. He also highlighted a consecutive increase in food price inflation, reaching its highest annual rate since February of the previous year, albeit remaining below its peak in early 2023.
Chancellor Rachel Reeves acknowledged the ongoing challenges faced by working individuals due to the cost of living, emphasizing government actions such as raising the national minimum wage for three million workers, introducing free breakfast clubs in primary schools, and extending the £3 bus fare cap. Reeves emphasized the commitment to implementing the Plan for Change to enhance individuals’ financial well-being.
Inflation reflects the changes in the prices of goods and services over time, with the Consumer Price Index (CPI) serving as the primary inflation measure. The ONS calculates inflation based on a representative “basket of goods” and services regularly updated to reflect consumer spending patterns. While the main CPI figure provides an average representation, individual prices of goods may vary. Lower inflation does not indicate price stagnation but rather a slower rate of price increases.
The Bank of England has incrementally raised interest rates over almost two years to curb inflation towards the 2% target, influencing borrowing costs and consumer spending. Higher interest rates lead to increased borrowing expenses, limiting disposable income and reducing demand, eventually moderating prices and inflation. However, the elevated base rate has resulted in heightened mortgage payments for many homeowners, amplifying financial strains. Following a series of rate cuts, the current base rate stands at 4.25%.
Inflation surged in 2021, peaking at 11.1% in October 2022, primarily fueled by escalating energy and food costs. Demand for energy surged post-Covid, further exacerbated by the conflict in Ukraine, which also inflated food prices due to increased expenses for fertilizers and animal feed. In September of the previous year, inflation hit a three-year low at 1.7% before gradually ascending again in October.