In October 2021, cost of living was at its highest for almost ten years, increasing by 4.2%, largely due to rising fuel and energy costs.
Now, on January 19th 2022, the UK inflation rate has soared to a 30-year high, with increasing pressure on living costs such as transport, gas, and electricity bills are also on the rise.
For example, gas bills rose by 28.1% in October 2021 when compared to October 2022, and electricity rose by 18.8%.
According to the Bank of England, the consumer price index measure of inflation is more than double the Bank’s targets.
As a result, the Bank of England increased interest rates to 0.25% in December 2021 in a bid to rein in rampant inflation.
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.
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.
Inflation has risen consistently since the Covid lockdown lifted, and pressure has been mounting for Bank of England to act.
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 consumers and households in Scotland, as well as other countries in the UK.