Inflation shows how the price of goods and services have changed over time and the Bank of England is set a target of keeping it at 2%
UK inflation rose slightly to 3.6% in the 12 months to June, in another cost of living blow for UK households.
This is higher than the 3.4% that was recorded in May. The Office for National Statistics (ONS) publishes inflation data every month and said the increase was largely down to higher food prices, plus fuel prices not falling by as much compared to last year.
Richard Hays, Acting Chief Economist at the ONS, said: “Inflation ticked up in June driven mainly by motor fuel prices which fell only slightly, compared with a much larger decrease this time last year.
“Food prices inflation has increased for the third consecutive month to its highest annual rate since February of last year. However, it remains well below the peak seen in early 2023.”
What is inflation?
Inflation shows 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, if the rate of inflation is 3% then it means an item that cost £1 last year would now cost £1.03.
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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.
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 four times to its current level of 4.25%.
Why did inflation go up in the first place?
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.
Inflation fell to its lowest level in three years in September last year when it dropped to 1.7% but started to creep up again in October.