UK inflation rate explained July

author: FutureCar Staff    

The Office for National Statistics (ONS) has reported that the Consumer Prices Index (CPI) in the UK has seen a significant drop, with the annual rate of price rises slowing down by 1.1 percentage points from 7.9% to 6.8%. This decrease can largely be attributed to a fall in gas and electricity prices, as energy bills fell significantly from 1 July when the Ofgem energy price cap took effect, replacing the government's energy price guarantee.

This reduction in energy bills is not only good news for consumers, but also for Rishi Sunak's Downing Street administration, as Prime Minister Boris Johnson has pledged to halve inflation by 2023. However, the Bank of England may not share the same optimism, as they are responsible for maintaining inflation at a sustainable level.

While the overall CPI has decreased, core inflation, which excludes categories like food and energy that tend to fluctuate, remained high at 6.9%. Additionally, services inflation continued to rise. With the ONS also reporting significant wage growth, the central bank may feel compelled to raise interest rates again in the near future.

So, what does the ONS CPI for July 2023 mean for individuals and the ongoing cost of living crisis? Inflation is an economic measure that indicates the increase in prices of goods and services over a specific period of time. In this case, the CPI figure of 6.8% means that prices are, on average, 6.8% higher than they were in July 2022. To put it into perspective, something that cost £1 last July is now approximately 7p more expensive on average. In comparison, during July 2022 when inflation was at 10.1%, the same product would have been 10p pricier. These increases in prices accumulate, impacting the cost of everyday expenses like a £60 supermarket shop, which would have cost only £49.80 two years ago.

While this year's figure indicates a smaller increase compared to last year, prices are still rising rapidly on average, while wages have not kept up with the rate of price hikes. It's important to note that the inflation rate is an average for the entire UK economy, and certain categories may have experienced higher price increases. For example, the inflation rate for olive oil is a staggering 41.5%. The high inflation rate indicates that the cost of living is likely rising for people across the UK, resulting in a decrease in the value of money.

Understanding the factors influencing inflation is crucial. Supply and demand play a significant role, as prices tend to rise when demand exceeds supply. Other factors include oil prices, which impact transportation costs, higher energy prices leading to increased production costs, wage increases that can embed price hikes, and government policies such as major tax hikes affecting spending and prices.

The ONS regularly publishes updates on the UK inflation rate, and it has been in the news frequently due to the steep climb in inflation over the past year. Several key factors have contributed to the high inflation rate, including the war in Ukraine affecting global food prices, sanctions against Russia impacting energy and fuel supplies, the post-Covid global recovery leading to increased demand for fuel and energy, and the effects of Brexit causing supply chain bottlenecks and wage increases.

While inflation has been falling in recent months, many of the drivers of price hikes have dropped out of the data. However, economists believe that Brexit continues to have an impact on the current inflation data. The ONS uses two main measures for inflation: the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The CPI, in use since 1996, calculates inflation based on a basket of goods and services commonly consumed in the UK. The RPI, used historically, includes mortgage interest payments and is influenced by house prices.

Both the CPI and RPI indicate that the cost of living in the UK has become significantly more expensive over the past year, with prices rising at a faster rate than wages. This has resulted in reduced disposable income and a decrease in the value of savings. The impact is particularly severe for lower-income households, as they spend a higher proportion of their income on necessities like food and energy. Food inflation has slowed down, but it remains high at 14.8%. Energy costs have contributed the most to the decrease in the headline inflation rate, with electricity price inflation falling from 17.3% to 6.7% and gas dropping from 36.2% to 1.7%.

Although there are signs that consumer purchasing power may align with inflation in the coming months, the combination of wage growth, high core inflation, and rising services inflation may lead to further increases in interest rate-related costs. The Bank of England aims to keep inflation at 2% to encourage current spending rather than seeing money lose value over time.

FutureCar Staff