UK inflation rate: Understanding July's CPI and RPI

author: FutureCar Staff    

The Office for National Statistics (ONS) has reported that the reduction in energy bills, as a result of the Ofgem energy price cap, was the main factor contributing to the decrease in the Consumer Prices Index (CPI). The annual rate of price rises dropped by 1.1 percentage points from 7.9% to 6.8%, with gas and electricity prices being the primary cause of the decline. This significant drop in energy bills began on 1 July when the Ofgem energy price cap replaced the government's energy price guarantee.

This news is not only beneficial for consumers but also for Rishi Sunak's Downing Street administration, as the Prime Minister has promised to halve inflation by 2023. However, the Bank of England may not be pleased with this development, as it is their responsibility to maintain inflation at a sustainable level.

Although the overall inflation rate has decreased, core inflation remains high at 6.9%. Core inflation is a measure that excludes categories that tend to fluctuate frequently, such as food and energy. Additionally, services inflation continues to rise. With the ONS reporting significant wage growth, the UK central bank may feel compelled to raise interest rates again next month.

The ONS CPI for July 2023 has implications for both 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. In the case of the CPI, the time period used is one year. Therefore, the current figure of 6.8% means that prices are, on average, 6.8% higher than they were in July 2022.

To put it simply, something that cost £1 last July is now approximately 7p more expensive on average. Comparing it to July 2022, when inflation stood at 10.1%, a product priced at £1 was 10p pricier. This may not seem significant, but when scaled up to a £60 supermarket shop, the same basket of food and drink would have cost only £49.80 two years ago.

This year's inflation figure builds upon the substantial increase in prices from the previous year. Although the current figure is lower than June's data, prices are still rising rapidly on average. Meanwhile, wages have failed to keep up with the rate of price increases.

It is important to note that the inflation rate represents an average for the UK economy. However, some individual categories have experienced price increases well above the inflation rate. For example, the inflation rate for olive oil is a staggering 41.5%.

Inflation is used by all Western countries to assess their economic performance. A high inflation rate, as currently experienced in the UK, indicates rising living costs for people across the country and a decrease in the value of money. Essentially, our money does not go as far as it used to.

At its core, inflation is influenced by supply and demand. When demand surpasses supply, prices tend to rise. Several factors contribute to this dynamic, including oil prices, energy prices, wage increases, and government policies.

The ONS regularly publishes updates on the UK inflation rate. In the past year, these figures have received significant attention due to the steep climb in inflation, which is now starting to decline.

There are several reasons why inflation has been high, including the war in Ukraine, sanctions against Russia, the global post-Covid recovery, and Brexit. Many of these drivers of price hikes have dropped out of the data, resulting in a decrease in inflation. However, economists believe that Brexit continues to affect the data.

The ONS uses two main measures of inflation: the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The CPI, in use since 1996, calculates inflation based on a typical basket of goods and services frequently consumed in the UK. The CPI allows for international comparisons and is utilized by the government to determine levels of state support. On the other hand, the RPI is used to compare current rates with historical rates and affects prices for items like train tickets and phone contracts.

The cost of living in the UK has become significantly more expensive over the past year, as indicated by both the CPI and RPI. Wages have not kept up with the steep rise in prices, resulting in decreased disposable income and reduced savings. The poorest households have been disproportionately affected by inflation, spending a larger proportion of their income on necessities like food and energy.

While the rate of food inflation has slowed down, it remains high at 14.8%. The biggest contribution to the decline in the headline rate of inflation has come from energy costs. Electricity price inflation dropped from 17.3% to 6.7%, and gas prices decreased from 36.2% to 1.7%. However, prices are still higher for consumers compared to a year ago.

There are indications that consumer purchasing power may align with inflation in the coming months. The ONS's labor market statistics show an increase in regular pay. Although this increase did not keep up with inflation, it suggests the possibility of recovering some of the losses incurred over the past 18 months in the near future.

However, the combination of wage growth, high core inflation, and rising services inflation may result in further increases in interest rate-related costs. The Bank of England aims to maintain inflation at 2%, as it is considered favorable for encouraging spending in the present rather than facing higher prices in the future.

FutureCar Staff