Why is inflation so high? What this means for me UK February CPI rate and interest rate link explained
Calls intensify for Bank of England to raise interest rates after February cost of living data hit 30-year high
Inflation in the UK is rising at its fastest pace for 30 years, according to the latest figures from the Office for National Statistics (ONS).
This served to intensify calls for the Bank of England (BoE) to raise interest rates to bring seemingly spiraling inflation under control once again – the rate currently sits at 0.75%.
Here’s everything you need to know about what high inflation means, why it’s currently so high, the BoE’s forecast for 2022, and the relationship between inflation and interest rates…
What does high inflation mean?
The inflation rate is used to measure the current cost of living.
It takes into account the current price of goods and services, including fuel, energy bills, food, clothing, and even things like the cost of used cars.
When the cost of basic goods and services rises, as they do now, households get less for their money, which means the value of the pound has depreciated.
In real terms, this means the £10 note in your pocket doesn’t stretch as far, allowing consumers to reduce the volume of their purchases or use more cash to get what they need. .
Why is inflation so high right now?
Inflation is a variable that can go down as well as up.
During the 2020 shutdowns caused by the Covid pandemic, inflation was low as people couldn’t go out and spend their money.
But as society began to open up again and businesses opened doors again, there was, and still is, pent-up demand for goods and services.
This demand, coupled with a constant supply or, in some cases, a reduction in supply, has prompted companies to raise prices, thereby stimulating the economy.
A growing economy has boosted employment rates, pumping more money into circulation and in turn demonstrating a healthy economy, as financial markets recover from Covid restrictions.
How high could inflation rise in the UK?
The inflation rate recorded for February 2022 was driven by the increase in the costs of clothing and footwear, fuel and energy, after the increase in the ceiling on energy prices.
Fuel, fashion, food and used car prices have all contributed to upward pressure on inflation, while commodity prices are at their highest level in 12 years.
Due to rising inflation, there have been calls for the BoE to raise interest rates to curb demand and further balance the economy.
Why do interest rates rise with inflation?
There is often a correlation between interest rates and inflation.
One is used to modify the other based on the current state of the economy and outside factors, such as a global pandemic.
When inflation rates are used to measure the cost of living, the interest rate is the amount charged by the lender to the borrower.
This extreme action was prompted by the Covid pandemic and, as the rate was raised to 0.75% this month, there are growing calls for the BoE to hike rates further. interest.
The low interest rate was put in place to encourage people to spend money during the lockdowns and restrictions imposed by the Covid pandemic, rather than saving it or keeping it in savings.
Typically, lower interest rates mean people spend more money, leading to economic growth with higher prices and higher employment rates as businesses keep up with demand.
It can also work the other way around, when there is an “overheating economy”.
High interest rates make saving more attractive, leading to slower economic growth due to lower prices for goods and services, which can lead to higher unemployment rates.
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