Why is inflation still so high and what’s core inflation?

Households are still shaken by high inflation, with average prices 8.7 percent higher than a year ago.

The official consumer price inflation measure (CPI) stalled at 8.7 percent in May, unchanged from April, according to the Office for National Statistics today.

But that 8.7 percent figure is just an average, and prices for different items are rising at different rates.

For example, utility bills, used cars, flights and recreational spending all helped keep inflation so high in May.

Meanwhile, core inflation – the underlying figure that drives out volatile food and energy prices – continues to rise, adding further headaches to the Bank of England over interest rates.

Here’s what you need to know about why inflation is so high and what’s driving prices up

On the rise: Inflation has fallen slightly this year, but still remains incredibly high

Price hikes: Utility bills, flights, and cultural events are some of the things that keep costs high

Price hikes: Utility bills, flights, and cultural events are some of the things that keep costs high

Why is inflation so high?

The inflation rate remains at a high level as the prices of almost everything have increased in the 12 months to May 2023.

The worst offenders are utility bills and food, but in May, things like used car prices and flights also helped drive up inflation.

The average utility bill is now £2,500 a year, although that will drop to £2,074 in July and remain at that raw level until March next year.

Food price inflation is 18.7 percent, slightly lower than in April (19.3 percent), but still pleasing to the eye.

Experts think food prices will fall, but at least remain above normal for the rest of this year, meaning inflation will remain high.

Flight prices are rising due to increased demand, higher fuel prices and rising airline wages and repair costs.

Another thing driving up inflation is what the ONS calls “recreational and cultural services.”

This includes things like cinema, concert and sports tickets, subscriptions and licensing fees.

Meanwhile, a combination of high demand and low supply is causing the price of used cars to skyrocket.

What is Inflation?

Inflation is a way of measuring how prices rise and fall for consumers.

The Office for National Statistics tracks the prices of dozens of goods and services every month, using something called the basket of goods.

It then calculates an average figure, which is inflation.

If inflation for the year is 10 percent, then the basket of goods that cost £1 a year ago would cost £1.10 today.

But since all of these numbers are rough averages, your personal inflation rate may vary depending on what you spend money on.

> Inflation calculator: how prices have changed over the years

Why is core inflation so high and why does it matter?

Core inflation is now at 7.1 percent, the highest level since 1992.

Core inflation excludes the price of energy and food, because their prices are so volatile, and alcohol and tobacco, because prices are so heavily influenced by taxes. It is seen as an important underlying inflation rate.

High core inflation is worrying, as it means the Bank of England is likely to raise its key interest rate, driving surging mortgage and loan costs even higher.

> Why are mortgage rates rising so fast – and how high will they go?

The idea of ​​core inflation is that by removing energy, food, drink and tobacco, you remove goods whose price is barely affected by changes in the Bank of England’s base rate.

Why are interest rates used to fight inflation?

The Bank’s base rate is the main instrument for controlling inflation. Raising the base rate raises the cost of borrowing and dampens demand for it, meaning less money flows into the economy.

Ultimately, increases in base rates should lead to a fall in inflation, while lowering base rates is a tool used to stimulate the economy and raise inflation.

Interest rates were cut to historic lows during the financial crisis and stayed there as central banks worried about a lack of inflation. Base rates rose slightly and then were cut again when Covid hit, remaining at the emergency low of 0.1 percent until December 2021.

The Bank has raised the base rate twelve times since the end of 2021, from 0.1 percent to 4.5 percent.

If core inflation is still high despite constant increases in base rates, this suggests that the bank’s strategy is not yet working and more rate hikes are likely to come.

The Bank’s monetary policy is causing enormous pain for mortgage borrowers, who find themselves having to refinance at much higher rates.

Warming: Core inflation prices are at their highest level in 30 years, meaning more key rate hikes are likely

Warming: Core inflation prices are at their highest level in 30 years, meaning more key rate hikes are likely

Julian Jessop, an economics associate at the Institute of Economic Affairs think tank, said: “Headline inflation should still fall sharply for the rest of the year as food and energy prices fall.

But the problem now is that core inflation, excluding food and energy, is no longer just ‘sticky’. On the contrary, it is actually going in the wrong direction.

‘This is partly caused by temporary factors such as the extra holiday and the large increase in the national minimum wage. The bigger picture, however, is that the UK is still paying for the bank’s underestimation of inflation and its decision to keep monetary policy loose for far too long.”

Is inflation likely to fall or rise further?

Inflation is likely to fall, but slowly.

The Bank of England thinks inflation has “turned a corner” and will fall to around 5 percent by the end of the year.

This will happen due to falling energy bills, cheaper imports and limited consumer spending, the Bank believes.

The Bank’s annual inflation target is 2 percent and it expects to reach this target by the end of 2024.

But inflation has so far proved more persistent in the UK than in other major economies. For example, inflation in the US has already fallen to 4 percent, while it is at 6.1 percent in the entire eurozone.

Myron Jobson, senior personal finance analyst at stockbroker Interactive Investor, said, “PWages remain much higher than Britons want and need to maintain financial resilience, and strong wage growth is likely to continue inflation ran high this year.

“Simply put, although there is a glimpse of the light at the end of the tunnel, the road back to normal remains a long, winding and uncertain road.”

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