Inflation rates have just risen to their highest level in 40 years.
Only last month, inflation was confirmed to be at a 30-year high of 7%. In a matter of weeks, this has jumped to 9%, according to the Office for National Statistics.
This has jumped to a staggering 10.9% for the UK’s poorest households, who have to use a larger portion of their budget to pay for their energy bills.
For context, the Bank of England has a mandate to keep inflation under 2%.
But what do these numbers mean for you and your bank balance?
Here’s what high inflation rates actually mean
Inflation is defined as the annual change in prices for a set of goods and services, a way of measuring how quickly prises are rising.
When inflation rates goes up, it means the average cost of living rises – which makes sense as the current average inflation rate is 9%, and the UK is in a cost of living crisis.
The current inflation rate means a £1 coffee becomes £1.09.
You might also have heard of the famous Goldilocks and the Three Bears analogy to help you understand why inflation is important.
If it’s too low, economic growth is too “cold” and won’t grow. If it’s too high, the economy’s too “hot” and growing too quickly.
The ideal inflation rate is “just right” – much like that third bowl of porridge – and is generally around 2%, give or take one percentage point.
This is how the current inflation rate compares to previous peaks over the last 70 years.
What has caused this?
After subsequent Covid lockdowns, the economy has struggled to regain its footing all over the world – but that’s not the only factor.
Surging energy bills are the largest contributor to inflation right now, because of the knock-on effect of the Ukraine war and how this has caused wholesale oil and gas prices to rise over a supply shortage. Many of the supply problems stem from the West’s sanctions against Russia.
As a result,the UK’s energy price cap was lifted. The average gas prices jumped by 53.5% and electricity prices by 95.5% in April.
Fuel prices have surged, with average petrol reaching 161.8p per litre in April this year (the highest on record) compared to 125.5p in April 2021.
The Bank of England governor, Andrew Bailey, has also warned of an “apocalyptic” rise in food prices. Shopping bills are already up 6.7% compared to last month.
The costs of other items, such as raw materials, household goods, furniture, restaurants and hotels are going up too, as is the rate of VAT for some firms.
Rates for air passenger duty and vehicle excise duty (commonly known as road tax) have been raised along with the cost of postage, water bills in England and Wales and interest rates for mortgage payments.
So are we heading for a recession?
A recession is when the economy shrinks for two consecutive quarters, signalling that people are, on the whole, spending much less.
The Bank of England has forecast “very weak” quarterly growth in 2023 and a contraction as a whole next year. It also predicts GDP will fall by 0.25% and unemployment will pick up sharply.
“It is a very weak projection, a very sharp slowdown,” Bailey said earlier this month. “There’s a technical definition of a recession it doesn’t meet – but to put that to one side – it is a very sharp slowdown in activity.”
As we move away from the inevitable economic dip, inflation is expected to gradually head back towards the 2% level set out by the Bank of England. But, that could be years away.
Here’s what the government has said
Prime minister Boris Johnson has suggested that he is considering additional help to ease the cost of living crisis, but more details on this support are yet to emerge.
Chancellor Rishi Sunak has warned that he can’t “protect people completely” from the “global challenges” of increasing prices, while Johnson promised to “look at all the measures that we need” to help get people “through to the other side”.
The Treasury has already pledged to spend around £22 billion to support the public, including £9 billion for energy bills and to mitigate the impact of the National Insurance Contributions.
Is it enough?
There are still pleas for the government to do more right now rather than wait for the autumn budget.
The British Chambers of Commerce also called for Sunak to reverse the rise in national insurance contributions and give businesses a VAT discount on their energy bills.
Labour want a full emergency budget and the Lib Dems want an emergency VAT cut while charities told HuffPost UK all kinds of urgent action is needed.
Opposition parties tried to push for a windfall tax on oil and gas companies, meaning any profits they had not anticipated as a result of the high global prices could be used to alleviate households.
However, the Conservatives voted against this tax on Tuesday, with ministers arguing that it would deter investment from oil and gas giants.
