UK inflation falls – What does it mean?

The UK’s rate of inflation decreased slightly from 10.7% in November 2022 to 10.5% in December 2022. But what does this really mean and will the cost of living get cheaper as a result? Find out below.

Measuring UK inflation

Inflation is defined as the increased cost of a product or service over time. For example, if a loaf of bread previously cost £1 but now it costs £1.10, the rate of inflation would be 10%. But not every item will increase in price at the same rate, which is why the UK’s inflation is calculated by tracking multiple everyday products known as the “basket of goods”.

The basket of goods is updated regularly by the Office for National Statistics (ONS), which is also the group responsible for measuring the UK’s inflation rate. Not everyone always buys everything in the basket of goods, so the ONS inflation rate cannot be 100% accurate for everyone.

UK inflation and the response

UK inflation has soared from around 2% in the final months of 2021 to a staggering 10.7% in November 2022. The Bank of England has a 2% inflation target, which it attempts to manipulate by changing the interest rate.

Fundamental economics tells us that increasing interest rates will reduce the rate of inflation, which is why the Bank of England has now made nine interest rate rises in a row. The latest interest rate increase meant the base rate has now reached 3.5%. But sometimes a central bank cannot control inflation alone, especially when external global factors are contributing to inflation, such as the invasion of Ukraine.

December was an interesting month for those keeping tabs on the rate of inflation. The inflation rate decreased slightly to 10.5%, coming down from the aforementioned 10.7% in November 2022. The main reason for the slight increase is thought to be due to a decrease in fuel prices for two consecutive months.

Does this mean the cost of living will decrease?

Although a decrease in the rate of inflation is significant, this event doesn’t indicate that everyday products are getting cheaper. It just means that the price of goods will get more expensive at a slower rate.

If you’re disappointed by this, it’s wise to keep in mind that decreasing prices might not always be a good thing. When prices are falling, consumers typically keep waiting before making a purchase to get the cheapest deal possible. Consequently, businesses make fewer immediate sales and revenue decreases. The business then tries to offset the reduced revenue; the main way they do this is by decreasing wages or laying staff off.

The Bank of England previously estimated that inflation will peak at around 11% and then will continue to decrease, which could prove to be fairly accurate. The bank has estimated that the rate of inflation will continue to drop to around 5% by the end of 2023.

February 2023