A surprising surge in inflation has pushed the UK economy into uncharted territory, with prices rising faster than in France or Germany, and sparking concerns about the impact on households and businesses.
A Surprising Inflation Rise: What It Means for the UK Economy
Higher energy bills were followed by the biggest rise in water bills for over 35 years. The continued rises in prices of food and services, a spike in airfares, have contributed to the highest inflation in a year – 3.5% in the 12 months to April. This situation is where prices are rising faster than in France or Germany.
Inflation rate measures the percentage change in prices of goods and services over time.
It's a key indicator of economic health, influencing consumer spending and business decisions.
Central banks aim to keep inflation within a target range, usually around 2%.
A high inflation rate can erode purchasing power, while low inflation may indicate stagnant economy.
Inflation is influenced by factors such as monetary policy, supply and demand, and external events like global conflicts or natural disasters.
Why the Inflation Rate Matters
For more workers, pay rises are still outpacing the rate at which prices are rising, meaning their money stretches further. However, this is not a guarantee that inflation will remain low and stable. The rise today is not about to be immediately reversed either. Wholesale global costs have contributed to higher gas and electricity bills, which are expected to decrease in the near future.
Distorted Figures and Ongoing Price Pressures
The rise in services inflation was partly due to a spike in airfares caused by late Easter holidays this year. This distortion will be reversed, but price pressures in other services, such as restaurant meals, remain higher than the Bank of England would like to see. Some economists worry that these rises may indicate that bosses are passing on National Insurance Contributions and wage cost increases.
Factors Affecting Future Inflation
Economists predict that inflation could inch up further over the next few months, although they think it will remain below 4%. The government’s policies could add to inflation. However, there are also factors that could help bring inflation down. US President Donald Trump‘s trade war has led to expectations of weaker global growth, which could reduce oil prices and food bills.
Uncertainty Looms
As the Chancellor acknowledges, inflation is painful for households, particularly those whose incomes aren’t keeping up. The outlook could be gloomier than initially thought. While there are some factors that can help curb inflation, it’s essential to understand the uncertainty surrounding this economic indicator.
