he inflation rates for August are to be announced this week, with many still struggling with the cost of living crisis despite signs of a breakthough.
The UK’s annual inflation rate fell from 7.9 per cent to 6.8 per cent in July, after energy prices fell. Earlier this week, it was announced that wages have surged and are set to overtake inflation for the first time in two years.
Prices are now rising at their slowest rate since February 2022 when inflation was 6.2 per cent and are going up less quickly than wages on average.
However, many could be affected by potential rises to rail fares, depending how the government negotiates a cap. Meanwhile, although food prices are rising less fast, an overwhelming majority of of consumers remain concerned about rising supermarket bills, other data from analysts Kantar showed.
In addition, a Bank of England policymaker has warned that cutting UK interest rates or keeping them at the current level could risk embedding high inflation into the economy. Catherine Mann, who is a member of the Bank’s nine-person Monetary Policy Committee in charge of deciding interest rates, has said she would rather “err on the side of over-tightening” monetary policy.
Furthermore, finance bosses still have little faith in the Bank of England’s ability to get inflation under control, as Bank’s the latest survey of decision makers shows they believe the consumer price index will still be above-target in August 2026.
The fall will also ease the pressure on the Bank of England to continue hiking interest rates although at least one more increase is expected next month from the current rate of 5.25 per cent.
But what is inflation and what does it mean for wages and mortgages?
What is inflation?
Inflation is a measure of the rate at which the prices of goods and services increase. It can occur when prices rise due to increases in production costs, such as raw materials and wages.
For example, if a bottle of milk costs £1 and that rises by 5p compared with a year earlier, then milk inflation is five per cent.
A surge in demand for products and services can cause inflation, as consumers are willing to pay more for the product.
What causes inflation?
There are various factors that can drive up prices or inflation in an economy. Typically, inflation results from an increase in production costs or in demand for products and services.
In the short term, high inflation can also be the result of people having a lot of surplus cash, or accessing a lot of credit and wanting to spend.
Despite consumers receiving little to no benefit from inflation, investors can profit if they hold assets in markets affected by it. For example, those who have invested in energy companies might see a rise in their stock prices if energy prices are rising.
Jeremy Hunt on a visit to India for talks on economic co-operation
/ PA WireHow is inflation calculated?
Inflation is calculated by measuring changes in the cost of living, and the official method used is the CPI. It is worked out by measuring the price of a “basket of goods” and services we use every day. This basket includes everything from the price of eggs to how much an e-book costs.
It is determined by the annual Family Expenditure Survey, a voluntary survey of about 6,000 people conducted by the ONS. It helps to determine the percentage of people’s incomes that are spent on different things. The results differ every year to reflect people’s shopping habits.
Once the survey results are in, the Government checks the prices of the 1,000 most common goods in the UK every month. The percentage changes in the price of individual goods and services are noted.
Percentage increases in price are then multiplied by the weighting the particular product category has been given, which shows how much it is affecting consumer budgets.
How does inflation work?
Inflation occurs when prices rise across the economy, decreasing the purchasing power of money. It refers to the broad increase in prices across a sector or industry, and ultimately a country’s entire economy.
Inflation can become a destructive force in an economy if it is allowed to get out of hand and rise dramatically.
Unchecked inflation can topple a country’s economy, as it did in 2018, when Venezuela’s inflation rate hit more than 1,000,000 per cent a month. This caused the economy to collapse and forced countless citizens to flee the country.
Inflation slowed in July amid a fall in energy costs and easing food prices
/ PA WireWhat does inflation mean for mortgages?
Rising inflation will have an impact on homeowners but how much depends on the terms of their mortgage.
The Bank of England may increase interest rates to try to slow inflation when it rises.
As a result, when interest rates rise, mortgages can become more expensive, although this will depend on their type.
People who have tracker mortgages, which track a base rate (usually the Bank of England’s), will see their interest rates rise a month after the Bank of England increases the base rate.
Meanwhile, people on fixed-rate mortgages won’t be affected immediately. These mortgages fix the interest rate a homeowner will pay for a certain length of time – usually two years or five years.
Once a tracker or fixed mortgage comes to an end, lenders can put borrowers on a standard variable rate (SVR) mortgage. This means mortgage payments could change each month, depending on the rate.
What does inflation mean for wages?
When inflation rises – and when wages don’t keep up – it affects the real value of pay. This means that wages don’t stretch as far as they used to.
This latest announcement means prices are now rising at their slowest rate since February 2022 and are also going up less quickly than wages meaning that most people are getting better off for the first time since October 2021.
On August 15 the ONS revealed that average basic pay surged by a record 7.8 per cent in the three months to June.