Inflation in the UK slowed to 1.7% in the year to September 2024, the lowest rate in over three years, providing some relief to households and businesses. However, even with this decline, prices are still rising, just at a slower pace. Here’s a closer look at what inflation means, how it’s measured, and how it affects you.
What Is Inflation?
Inflation refers to the rate at which the prices of goods and services increase over time. For example, if a loaf of bread costs £1.00 today and £1.05 next year, the annual inflation rate for bread would be 5%.
The Bank of England targets an inflation rate of 2%, considering it a level that supports a stable economy. When inflation deviates too far from this target, the Bank adjusts interest rates to try and bring it back in line.
How Is Inflation Measured?
The Office for National Statistics (ONS) calculates inflation using a "basket of goods," which includes hundreds of everyday items. This basket is updated regularly to reflect shopping habits—2024 additions include air fryers and vinyl records, while items like hand sanitiser were removed.
The primary measure of inflation, the Consumer Prices Index (CPI), rose by 1.7% in the year to September, down from 2.2% in August. Analysts had expected a smaller drop to 1.9%, but lower airfares and petrol prices contributed to the larger decrease.
Why Are Prices Still Rising?
While inflation has fallen significantly since its peak of 11.1% in October 2022, it doesn’t mean prices are decreasing—it just means they’re increasing more slowly.
Inflation surged in 2022 due to:
- High energy demand post-COVID.
- The impact of the Russia-Ukraine conflict on global energy prices.
- Persistent high food prices.
Although energy and food prices have stabilized, sectors like services (e.g., restaurants and hairdressers) continue to experience noticeable price hikes.
How Do Interest Rates Affect Inflation?
The Bank of England uses interest rates to manage inflation. When inflation is high, the Bank raises interest rates to make borrowing more expensive, encouraging saving and reducing spending.
For example:
- Households: Higher mortgage rates mean less disposable income, which reduces spending.
- Businesses: Expensive loans may lead companies to cut back on hiring and investment.
In November 2024, the Bank cut rates for the second time this year to 4.75%, signaling a cautious effort to support the economy while keeping inflation under control.
Are Wages Keeping Up?
Despite slower wage growth, earnings are currently outpacing inflation. Between July and September, average pay (excluding bonuses) grew by 4.8% annually, compared to a 1.7% inflation rate. This means workers are seeing modest gains in real terms, though the overall growth rate in wages has slowed.
Key Takeaways for You
- Cost of Living Relief: Slower inflation offers some respite, but prices remain higher than pre-pandemic levels.
- Interest Rates Impact: Mortgage holders may face ongoing challenges, but savers benefit from better returns.
- Wage Trends: While wages are rising faster than inflation, slower pay growth could dampen purchasing power in the future.
As inflation continues to moderate, it’s essential to manage your finances carefully. Keep an eye on interest rate changes and look for opportunities to save or invest wisely. If you’re uncertain about navigating the current economic climate, consult financial professionals like the team at Amanah Accountants for more advice.