UK Inflation Rate Surges to 3.6% in Latest Blow to Cost of Living

The UK inflation rate has unexpectedly climbed to 3.6% in the 12 months leading up to June, surpassing the projected 3.4% or marginal 3.5% increase forecasted by most analysts. This marks the highest inflation level recorded in nearly 18 months. The Office for National Statistics (ONS) attributes this rise primarily to increased food prices and less significant declines in fuel prices compared to the previous year.

Ideally, inflation should hover around 2%, and the Bank of England aims to maintain this level by adjusting its base interest rate, currently set at 4.25%. The upcoming Bank of England meeting on August 7 will determine whether the rate remains unchanged or sees adjustments. Core inflation, excluding volatile energy, food, alcohol, and tobacco prices, has risen from 3.5% to 3.7%.

Acting Chief Economist at the ONS, Richard Hays, highlighted the uptick in inflation driven mainly by the slight drop in motor fuel prices compared to a more substantial decrease the previous year. He noted a consecutive three-month increase in food price inflation to its highest annual rate since February of the preceding year, albeit still below the peak observed in early 2023.

Chancellor Rachel Reeves acknowledged the ongoing struggles of working individuals with the cost of living. Reeves emphasized government actions such as raising the national minimum wage for three million workers, introducing free breakfast clubs in primary schools, and extending the £3 bus fare cap. She reiterated the commitment to implementing the Plan for Change to bolster disposable income.

Inflation reflects the fluctuation in prices of goods and services over time, with the Consumer Price Index (CPI) serving as the primary inflation gauge. The ONS calculates inflation based on a diverse “basket of goods” and services that mirror typical household expenditures. While the headline CPI figure represents an average, individual prices of specific goods may deviate from this average. A lower inflation rate does not signify a halt in price increases but rather a slower rate of escalation.

The Bank of England incrementally raised interest rates over nearly two years to curb inflation towards its 2% target. This base rate directly influences the interest rates offered by financial institutions. Higher base rates translate to pricier borrowing costs, restricting consumer spending and subsequently curbing demand to lower prices and inflation. The recent base rate of 4.25% contrasts sharply with the December 2021 rate of 0.1%, which peaked at 5.25% in August 2023 before undergoing four subsequent reductions.

Inflation’s upward trajectory since 2021 culminated in a peak of 11.1% in October 2022, largely attributed to surging energy and food expenses. Post-Covid energy demand surged, exacerbated by the Ukrainian conflict, which further escalated food prices due to heightened input costs like fertilizers and animal feed. After hitting a three-year low of 1.7% in September last year, inflation began its ascent once more in October.