Inflation rises above Bank of England target again - what it means for your money

UK has climbed above the target once again, official figures released today show.

Inflation rose to 2.3% in the 12 months to October 2024 - up that was recorded in September, when it dropped to its lowest level in three years. The latest inflation figure is slightly worse than the 2.2% that had been expected by the majority of economists.

However, inflation is still down from its peak of 11.1% in October 2022. The Bank of England has a target of 2% inflation and its previous drops had paved the way for two interest rate cuts. The Office for National Statistics (ONS) releases inflation data every month and said the latest increase was down to higher energy costs.

Treasury Chief Secretary Darren Jones said: “We know that families across Britain are still struggling with the cost of living. That is why the last month focused on fixing the foundation of our economy so we can deliver change.

“That includes boosting the national minimum wage, freezing fuel duty and protecting working people’s payslips from higher taxes. But we know there is more to do. That is why the Government is focused on economic growth and investment so we can make every part of the country better off.”

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What is inflation?

Inflation shows how the price of goods and services has changed over time, with the Consumer Price Index (CPI) being the primary measure of inflation. The ONS tracks 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.

What does it mean for prices in shops?

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. 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. It was finally cut to 5% in August 2024, with a further cut to 4.75% confirmed in November 2024. The next base rate decision is due on December 19.

Why did inflation peak?

Inflation began to rise in 2021 largely due to higher costs of energy and food. Demand for energy increased after and then this was exasperated by the Russian invasion of . 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.

Will inflation keep rising?

The Bank of England expects inflation to rise to about 2.75% in the second half of this year, following sticky price rises in the service sector and strong wage growth. It then expects inflation will fall back down to 1.7% in 2026, then to 1.5% in 2027.

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