Inflation shows how the price of goods and services have changed over time, with new data released every month by the Office for National Statistics
UK inflation rose to 3% in January in another cost of living blow for UK households.
This is up from the 2.5% that was recorded in December and means inflation is continuing to edge higher above the 2% target the Bank of England is aiming for. Most economists had expected inflation to rise to 2.8%. Inflation fell to 1.7% last September, its lowest level in three years, but started to rise again in October after energy bills went up.
The Bank of England predicts inflation could reach 3.7% this autumn. The Office for National Statistics (ONS) releases inflation data each month and blamed the rise on higher air fares and private school fees. Core inflation – which excludes energy, food, alcohol and tobacco, and is closely watching by the Bank of England – rose from 3.2% to 3.7%
Grant Fitzner, chief economist at the ONS said, said: “Inflation increased sharply this month to its highest annual rate since March last year. The rise was driven by air fares not falling as much as we usually see at this time of year, partly impacted by the timing of flights over Christmas and New Year. This was the weakest January dip since 2020.”
He added: “After falling this time last year, the cost of food and non-alcoholic drinks increased, particularly meat, bread and cereals. Private school fees were another factor, as new VAT rules meant prices rose nearly 13% this month.“
What is inflation?
The Office for National Statistics (ONS) releases inflation data every month to show how the price of goods and services have changed over time. The Consumer Price Index (CPI) is the main measure of inflation. The ONS calculates inflation based on a regularly updated “basket of goods” and services that represents what households are buying.
However, the main CPI figure you see in headlines is used to represent an average. This means the individual prices of some goods may be higher or lower than this main figure. When inflation is lower, it does not mean prices have stopped rising – it just means they’re going up at a slightly slower rate than before. For example, the rate of inflation is now at 2% – so this means an item that cost £1 last year would now cost £1.02.
How is inflation linked to interest rates?
The Bank of England increased interest rates over the course of almost two years to try and lower inflation to its 2% target. The base rate influences the interest rate you’re offered by banks and lenders – so when it is higher, borrowing becomes more expensive and this means people have less money to spend elsewhere. When people spend less money, this brings down demand and lower prices, which should then lower inflation.
But a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched. The base rate stood at just 0.1% in December 2021. It reached a peak of 5.25% in August 2023 but has since been cut three times to its current level of 4.5%.
Why did inflation peak?
Inflation began to rise in 2021 and peaked at 11.1% in October 2022. The steady increase was largely due to higher costs of energy and food. Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine. The war also pushed up food prices, due to rising costs for fertilisers and animal feed. Both energy and food price rises have come down in recent months, although they are still higher than before.
