UK inflation rate: what is it, and what does it mean for me as rates hit 2% target for first time in 2024?
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- UK inflation has reached the 2% target for the first time in almost three years
- CPI inflation is down from 2.3% in April, marking a slowdown in the rate of price increases
- Although prices are still rising, the rate of increase has slowed, providing relief after steep cost increases
- The fall in inflation is seen as a positive by the Conservative government
- But opposition parties argue that many people still feel worse off due to high prices, mortgage bills and taxes
- Experts warn the ‘job is not done’, and inflation could rise again if month-on-month price increases continue
Inflation has returned to the 2% target for the first time in almost three years, a significant development just weeks before the general election.
The Office for National Statistics (ONS) reported that Consumer Prices Index (CPI) inflation dropped to 2% in May, down from 2.3% in April.
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Hide AdThis marks the end of nearly three years of above-target inflation, with CPI last at 2% in July 2021 before it surged due to the cost-of-living crisis.
The latest inflation figures mean that while prices are still increasing, the rate of growth has significantly slowed compared to recent years, when households and businesses were heavily impacted during the peak of the crisis.
But what exactly is inflation, and what does the latest data mean for households and the economy? Here is everything you need to know.
What is inflation?
Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of a currency. In simpler terms, as inflation increases, each unit of currency buys fewer goods and services.
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Hide AdThe inflation rate is the percentage change in the price level of a basket of goods and services over a specified period.
For example, May’s inflation rate of 2% means that if an item cost £100 a year ago, the same thing would now cost £102.
What does it mean for households?
The cost of living is still rising, just at a much slower rate than it has in recent years. Less than two years ago, prices were soaring by as much as 11.1%, largely because of significantly higher gas and electricity costs.
Prices for UK households are significantly higher than before the rise and fall in inflation, and experts have said that despite the recent milestone for inflation, there is still work to do in bringing down prices throughout the economy.
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Hide AdThe fall in inflation is still likely to be seized on by Rishi Sunak’s Conservatives as a sign that their economic plan is working.
But shadow chancellor Rachel Reeves said: “After 14 years of economic chaos under the Conservatives, working people are worse off. Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high.”
Liberal Democrat Treasury spokeswoman Sarah Olney said: “The hard truth is that millions of people won’t be feeling any better off today.”
Jake Finney, economist at PwC, warned it is “not ‘job done’ yet”. He said: “If prices continue to rise at the same month-on-month rate as they did this month (0.3%), then headline inflation will be back over the 2% target next month (at 2.1%).”
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Hide AdWill prices ever go down?
Despite the fall in inflation, some items have been going down in price. The price of housing, furniture and household goods all fell, compared with the previous year, the ONS said on Wednesday (19 June).
Some food prices also fell last month, such as fish, milk, cheese, and eggs. Other food prices, like meat, bread and cereals, have just risen at a slower rate.
But the UK government, like many others, actively aims to avoid falling prices (deflation), and sets the Bank of England a target to keep the inflation rate at 2%.
Deflation can lead to reduced consumer spending, and when prices are expected to fall, consumers and businesses may delay purchases and investments, anticipating lower prices in the future. This can result in decreased economic activity and slower growth.
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Hide AdDeflation also increases the real value of debt, which means repaying loans becomes more expensive in real terms when prices fall, which can lead to higher default rates and financial instability.
A stable inflation rate of around 2% is seen as a sign of a healthy economy that encourages spending and investment, as people expect prices to rise moderately over time.
It also helps businesses and consumers make long-term financial decisions with more confidence, reduces uncertainty and helps maintain a stable economic environment.
How has inflation impacted you? Is the current trend is sustainable? Share your thoughts in the comments section and join the conversation.
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