Among the primary reasons for this fast increase in inflation are high fuel and energy prices, the cost of second-hand cars, and the expense of dining out, according to the Office for National Statistics.
Inflation first started to rise steeply after the COVID restrictions were lifted and the economy reopened. The Bank of England is increasingly certain that it may have to raise interests in the coming months in order to combat ever-rising prices.
The October inflation figures are significantly higher than the 3.1 per cent recorded in September and is more than double the Bank’s target of 2 per cent.
Inflation measures the rate at which prices increase. For example, if a product costing £1 rises in price by 5p, then the inflation rate for that particular product is 5 per cent.
Services are also affected by rising inflation, and while low levels of inflation can largely go unnoticed from month to month, over the longer term they can have a huge impact on how much you can afford to buy with your money. And that’s why inflation is also referred to as the cost of living.
During the recent period of inflation, the most obvious price rises have been in the costs of household gas and electric bills. Since Ofgem lifted the price cap on domestic gas and electricity last year, gas bills have risen by a massive 28.1 per cent due to the surge in global oil prices. Electricity bills have also climbed by a significant 18.8 per cent.
Other factors have also contributed to the rise in prices for goods and services. The demand for oil and gas has grown even further, not just in the UK but across many parts of the world. This results in higher energy bills for businesses, many of which will resort to passing at least some of the burden onto their customers.
This stresses the importance for businesses to consider when it’s beneficial to compare business electricity rates from suppliers. If they can secure reduced costs, these savings can be passed onto their customers, encouraging their custom in future.
Another factor contributing to rising inflation is the global shortage of goods, most notably building materials and computer chips. The latter, the widespread difficulty in sourcing computer chips, has been one of the leading causes for stoppages in the production of new cars. That’s resulted in an increase in the prices of second-hand vehicles as people struggle to replace older vehicles.
Government support for businesses offered during the pandemic has now largely been retracted, leading to rising costs and therefore prices for end consumers. And many companies in the transportation and hospitality industries are facing difficulties recruiting staff, both because of the pandemic and the effects of Brexit, and are therefore being forced to increase wages to attract new employees. These costs, too, are being ultimately passed onto consumers.
People’s finances are being adversely affected, to say the least. While some have increased their working hours to meet the rising household bills, they say any extra money they have gained is now being used to pay for increased costs in fuel, food, and clothing.
Inflation may continue to rise, even up to 5 per cent, before it shows any signs of going back down.
Sir John Gieve, a former member of the Bank of England’s Monetary Policy Committee which is responsible for setting interest rates, said that this situation may continue long into next year.
Chancellor Rishi Sunak stated that, while he understood UK citizens were feeling under pressure with the rising cost of living, many other countries are also experiencing the same levels of inflation as all economies feel the effects of COVID.
But Rachel Reeves, the shadow chancellor, said that households would be more than £1,000 worse off a year due to the price rises, and this was due to Government inaction.
It’s true, though, that across the world, the picture looks the same. US consumer prices rose by 6.2 per cent in October, which was the fastest increase in the last three decades. Canada also hit the same level in September, which was the highest in the country over last 18 years.
As far as the interest rates in the UK are concerned, most analysts expect the Bank of England to increase interest rates next year following their meeting in December, after a historically low-interest rate in the past year.
Low interest rates then meant that it was cheaper for people and businesses to borrow money they could use to spend or invest. That, in turn, added to the growth of the economy.
While growth is encouraged, surging inflation could be bad news for regular households. If the Bank of England raises interest rates, High Street banks may put up the borrowing costs they charge from businesses and individuals.
On the other hand, higher interest rates mean people will get a better return on their savings which would encourage a climate of saving rather than spending. In theory, if more people saved their money in banks, it would slow the increase of prices of everyday goods by tempering demand. However, analysts say that a rate rise may not be effective in the current case because the majority of the factors affecting inflation are global rather than local in nature.
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