The cost of living in the UK has increased at its fastest rate for four decades, as soaring energy bills put millions of households under pressure. Consumer Prices Index inflation rose to 9% in the year to April, up from an already high 7% in March, the Office for National Statistics (ONS) said. It was the fastest measured rate since records began in 1989, and the ONS estimates it was the highest since 1982.
A large portion of the rise was due to the price cap on energy bills, which was hiked by 54% for the average household at the start of the month. The figures will add to pressure faced by households to cut back on bills and everyday spending.
But what does inflation actually mean, and how does it affect you on a day-to-day basis?
What does inflation mean?
In terms of economics, inflation refers to a general increase in prices and a fall in the purchasing value of money. When the general price of items rises during inflation but the value of money stays the same, consumers can buy fewer items and goods for the same monetary sum.
On a small scale, inflation can be good for the economy, as it encourages shoppers to buy goods sooner, boosting businesses in the country. This has also been shown to improve productivity not just for businesses, but also for workers.
What does high inflation mean?
High inflation, therefore, is when prices for goods and items is unusually high. Shoppers can therefore get less for their money when purchasing.
Although a little inflation can be positive, it can also damage individual finances, depending on the circumstances.
High inflation is also generally bad for savers, as low interest rates combined with rising inflation means that there is less chance of seeing a return on money in savings accounts and investments. On Thursday February 3rd, the Bank of England stated that consumer price inflation is likely to peak at around 7.25% in April 2022, up from 5.4% in December 2021.
What happens when inflation rises?
When inflation rises, the cost of living goes up, as confirmed by the Office for National Statistics this year. The purchasing power of individuals is also reduced, especially when interest rates are lower than inflation.
In this case, as the Bank of England has stated it may need to increase interest rates in the coming months, this is a real possibility.
Interest rates often increase during periods of high inflation because lenders demand higher interest rates as compensation for the loss in purchasing power and value of the money they will be paid in the future. As a result, savers may suffer and households may find it harder to stay within their budgets.
The Bank of England has warned the public about the worst hit to household finances for at least 32 years, forecasting that disposable incomes, post tax and inflation, will fall by around 2% in 2022.
Britons are facing a triple whammy threat this spring, with Ofgem hiking its annual energy price cap by nearly £700 in April on top of widespread inflation due to recent supply chain pressures and the Government’s national insurance increase.
Figures on Tuesday revealed salary rises are already lagging behind inflation, with total pay growth up by 4.3% for the quarter to December, far below CPI. Chancellor Rishi Sunak has so far resisted growing calls for his tax rise to be postponed, instead offering support including a state-funded £200 discount on energy bills in October, which households will need to repay eventually.
Do Bank of England interest rates affect Scotland?
Interest rates set by the Bank of England affect lending and mortgage rates across the UK, including Scotland.
In addition, many of the effects of high inflation will affect households in Scotland, as well as other countries in the UK.
Additional reporting by PA.