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Latest inflation: Key moment as inflation falls to 2% target after three-year battle – here’s what it means for interest rates | UK News
Basically, inflation is the rate at which prices rise.
It directly affects our overall cost of living, and if wages don’t increase at the same rate, the value of your money decreases.
It is impacted by many different factors, including global conflicts – with the war in Ukraine having a huge impact on food and gas prices in recent years. Some argue that Brexit has also had a negative impact.
In the UK, inflation is measured monthly – comparing how much prices are rising compared to the same period the previous year.
The headline inflation number, which you’ll often see in the news, measures price increases for a range of products we need in our daily lives.
The most commonly used inflation index is the Consumer Price Index (this is the update at 7am today) – and the target for many Western governments is 2%.
One thing to note is that falling inflation doesn’t mean prices are falling – just that they’re rising less quickly. You would need a negative value, or negative inflation, to see prices fall across the board.
Why does inflation affect interest rates?
The Bank of England raises interest rates to try to slow down spending and encourage saving – when this happens, prices/inflation tend to fall.
When inflation falls, interest rates tend to fall.
Potential winners and losers from high inflation
Globally, a high and volatile inflation rate is widely considered harmful to the economy – but there are some people who could benefit from it.
Workers with wage bargaining power (perhaps those who belong to strong unions) may fare better, as they can protect their income by bidding for higher wages.
Producers could end up benefiting if their prices rise faster than their costs.
People with shares or property could also see the value of their assets increase if there is a sustained period of price inflation.
However, retirees on fixed incomes are likely to be worse off as inflation reduces the real value of their pensions and other savings.
The poorest members of the population will also feel the pinch most, as the costs of loans, food and household services are high.