Money Wellness
image of a newspaper with an graph showing an up trend for inflation
category iconcost of living
calendar icon24 May 2023

Inflation begins to drop but food remains expensive

Inflation has dropped to 8.7%, the lowest it’s been since March 2022, according to the UK consumer price index (CPI). But food prices are still at a 45-year high.

The fall in inflation was not as big as experts expected, with analysists predicting a drop to around 8%. This is because food prices are still rising, up 19.3% on the same time last year and only slightly down on March’s eye-watering figure of 19.6%. There has also been an increase in the cost of second-hand cars and cigarettes, heaping more pressure on financially stretched Brits.

What remains to be seen is if this drop in inflation is enough to make the Bank of England hold interest rates when it reviews them on 22 June.

The Chancellor, Jeremy Hunt, said: “Although it is positive that it is now in single digits, food prices are still rising too fast.

“So as well as helping families with around £3,000 cost-of-living support this year and last, we must stick resolutely to the plan to get inflation down.”

The fall in this May’s CPI figures reflect last April’s sky-high rise in energy bills when the energy price cap soared by 54%, as a result of Russia’s invasion of Ukraine. This has been controlled since by the government’s introduction of the energy price guarantee (EPG), which capped an average household’s bills at £2,500.

In more promising news, Ofgem is expected to confirm tomorrow that energy prices will fall sharply for households from July when the current EPG comes to an end. Forecasters have predicted that the price cap will fall to around £2,000.

 

What does inflation mean?

Inflation is the increase in the price of something over time. For example, if a bottle of milk costs £1 but £1.05 a year later, then annual milk inflation is 5%.

 

How is the UK’s inflation rate measured?

The Office for National Statistics comes up with the inflation figure by keeping track of the prices of hundreds of everyday items in an imaginary ‘basket of goods’.

Each month’s inflation figures show how much these prices have risen since the year before.

You can calculate inflation in various ways, but the main measure used is the CPI.

 

Why are prices rising so fast?

The soaring cost of food and energy have been key drivers of inflation.

Oil and gas were in greater demand as life got back to normal post COVID. At the same time, the war in Ukraine meant less was available from Russia, putting further pressure on prices.

The war also reduced the amount of grain available, pushing up global food prices.

This effect was compounded in the UK in February by a shortage of salad and other vegetables, which took food inflation to a 45-year high. The result has seen milk rise more than 38%, with eggs and cheese up over 33% and 32% respectively.

Alcohol prices in restaurants and pubs have also risen.

 

Are wages keeping up with inflation?

Pay increases for many people aren’t keeping up with rising prices.

The average salary in the UK was around £598 a week in March, up £2 on the month before.

Throughout 2022, the average salary rose by nearly £3 a month.

But when you take inflation into account, the average salary fell by 2% in the three months to March, compared with the same period the year before.

 

What can be done to tackle inflation?

The Bank of England has a target to keep inflation at 2% but the current rate is still more than five times that.

The bank’s traditional response to rising inflation is to put up interest rates.

This makes borrowing money more expensive and can mean some people with mortgages see their monthly payments go up. Some saving rates also increase, but these rises are often not passed on to savers.

When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises.

Businesses also borrow less, making them less likely to create jobs and more likely to cut staff numbers.

 

When will inflation come down?

Lower inflation does not mean prices fall. It just means they stop rising as quickly.

The Bank of England is expecting inflation to drop to 5% by the end of 2023.

Prime Minster Rishi Sunak has said halving inflation by the end of 2023 is one of the government’s key five pledges.

 


 

Avatar of Caroline Chell

Caroline Chell

Caroline has worked in financial communications for more than 10 years, writing content on subjects such as pensions, mortgages, loans and credit cards, as well as stockbroking and investment advice.

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