Rejoice. The Bank of England has tamed the inflation dragon and reduced it to its legendary 2% target for the first time since July 2021.
But looking at figures from the Office for National Statistics, our analysis shows that inflation has reached a total of 20 per cent since then as households have battled a crisis of higher cost of everything.
Some may have been able to absorb the price increases without breaking a sweat, but many others have had a miserable time trying to keep up with the inflationary beast.
Much of the inflationary drama was caused by increases in energy prices thanks to the end of the blockade and global conflict: a knock-on effect that affected almost all companies, with the additional costs subsequently being passed on to customers.
Bills, bills, bills – the last few years have been brutal on our personal finances, including the rising cost of the weekly supermarket shop.
In the South East it is now difficult to find a flat white for less than £3.50, or a pint for £6.50, and across the country we have had to deal with higher energy bills, spiraling supermarket costs, businesses of telecommunications that rack up sky-high increases based on inflation, and that’s without taking into account council tax increases, skyrocketing mortgage and rental costs, just to name a few.
These are not going to suddenly start falling. Prices have been set. In the imaginary basket of 700 goods and services that represents what households buy, prices are still up 2 percent in the year to May.
This is a far cry from when inflation peaked in October 2022 at a whopping 11.1 percent, the highest rate in 40 years.
But declining inflation doesn’t mean prices are now magically falling. Some items in that basket have become cheaper, but overall, the basket is still increasing, just not as quickly.
Yes, wage growth has been steady – and has outpaced inflation since the middle of last year – but much of it has been absorbed by rising bills across the board.
Our personal finances have been a hot topic in next month’s election, and now all the major political parties are outlining in their manifestos what they plan to do and how they think they can fund it (and of course, a lot of it is confusing, so to speak). ). slightly).
According to the ONS, the reduction in annual inflation is due to “downward contributions” from eight divisions, partially offset by “upward contributions” from two.
The biggest drop came from food and non-alcoholic beverages, with prices rising 1.7 percent through May 2024. This is the lowest since October 2021 and represents 14 months of easing, from a recent high in 19.2 percent in March 2023.
The ONS says the main downward barrier in this category came from a combination of bread and cereals, vegetables, sugar, jams, syrups, chocolate and confectionery. In each case, prices fell between April and May of this year, compared with a monthly increase a year ago.
But as the Energy and Climate Intelligence Unit points out, the basket of some basic foodstuffs has increased by 40 percent in the last three years.
It says the basket of goods, which includes potatoes, rice, broccoli and coffee, has increased from £23.73 to £33.96 in that time.
For example, the price of a bottle of olive oil has increased by 136 per cent since June 2021, from £3.64 to £8.60.
A bag of sugar is up 72 per cent to £1.19 from 69p and potatoes are up 49 per cent in price, up 19 per cent since December 2023.
It says a 2.5kg bag of potatoes now costs £2.20, down from £1.85 just a few months ago, after a record-breaking wet autumn and winter hit the UK potato crop.
It notes: “Although inflation so far this year has fallen, prices have remained near record levels and many foods have not fallen since they began to rise rapidly in the second half of 2021.”
Other areas that have experienced flexibility according to the ONS are recreation and culture, and furniture and household goods.
Transportation provided an upward offset, mainly thanks to the higher costs of refueling the car compared to a year ago, although it noted that used car prices have dropped enormously.
Price increases for staples like food and energy have come as rent and mortgage costs have soared for most.
The big question is: will the Bank act by starting to cut the base rate? If market guesses are accurate, the likelihood of a surprise cut today is slim to none, while for August, the odds have widened, despite hitting 2 percent.
Pressure is likely to increase for a rate cut to potentially help reduce personal borrowing costs, but the stars will have to align to convince more MPC members to cut.
Importantly, while the CPI inflation measure stands at 2 percent, the base rate (which excludes food and energy) was 3.5 percent, and services inflation still sits at 5.7 percent.
There is also the potential for inflation to rise again between now and the end of the year, with Ofgem’s cap on energy bills being the most likely cause – experts at Cornwall Insight believe it could be £1,762 over the last three months of the year, compared to £1,568 from July to September.
That would be a typical 12.3 percent increase that would once again be included in our monthly expenses.
The inflation dragon is sleepy, but not completely out of action.
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