In a significant development, inflation has finally fallen below double digits, marking a notable shift in the economic landscape. This drop, amounting to a decrease of 1.4%, brings the inflation rate down to 8.7%. The latest figures indicate that this is the first time inflation has dipped below double digits since August, and it holds promising implications for the overall economic health. According to data from the Office for National Statistics (ONS), this figure is lower than the 10.1% that was reported in March. The rate at which food costs are increasing is still a cause for concern, despite the fact that inflation has fallen below double digits for the first time since August of last year. According to the ONS, the stability of gas and electricity prices in April is what caused the fall in inflation. It should be remembered that even while inflation is declining, prices are still increasing, albeit slightly more slowly.
The ONS discovered that the cost of food and non-alcoholic beverages increased throughout April, which helped to drive up the inflation rate. This number, which was 19.2% in the year ending in March and 19.1% in the year ending in April, decreased marginally but is still alarmingly high. This article aims to explore the causes and effects of inflation, shed light on the significance of this recent development, and discuss potential implications for consumers and businesses.
To grasp the significance of inflation dropping below double digits, it’s crucial to comprehend the concept itself. Inflation is the general increase in the price of goods and services over time. It is often measured using a price index, which compares the value of a basket of goods and services consumed by households over different periods. When the economy experiences demand-pull inflation, the demand for goods and services exceeds the economy’s capacity to produce them. Various factors, such as increased demand, supply disruptions, or changes in energy costs, can contribute to inflationary pressures.
Jeremy Hunt, the Chancellor of the Exchequer, commented on the inflation rate, saying: “Food prices are still growing too quickly, despite the fact that the IMF declared yesterday that we’ve taken serious action to combat inflation. Therefore, in addition to providing families with roughly £3,000 in cost of living assistance this year and last, we must steadfastly adhere to the plan to bring down inflation. Families will be concerned about rising food prices and other basic costs as bills continue to soar, she said.
“They will be asking why this Tory government still refuses to adequately address this cost of living crisis, and why they won’t introduce a proper windfall tax on the enormous profits of oil and gas giants,” says the author. The core rate of inflation increased to 6.8% last month from 6.2% in March, the highest level since 1992. The Bank is concerned about core inflation since it excludes items like food and fuel. Although headline inflation has decreased, prices are still rising faster than salaries, and many people are still caught in a cycle of financial crises, according to Royal London’s consumer finance expert Sarah Pennells.
“Food inflation is still persistently high, and the base rate of the Bank of England has increased 12 times since 2008, raising the cost of borrowing for millions of households.
“While families are trying to stretch their money by making cuts to their regular spending, many are still in an overdraft or must borrow money before the end of the month.”
Inflation: What is it? – and why is the price so high?
The Consumer Price Index (CPI) gauges inflation by monitoring changes in prices over a 12-month period.
When the rate of inflation is 2%, for instance, anything that cost £1 last year would now cost £1.02 today.
The cost of a £1 item last year, would now cost £1.10 due to inflation of 10%.
Additionally, it implies that you can no longer get as much for your money as you once could.
This is particularly bad if pay growth isn’t keeping up with inflation because you’ll have to spend more of your income on necessities.
Additionally, from December 2021, the Bank of England has increased interest rates eleven times in a row due to higher inflation.
Because interest rates are the main weapon the Bank of England uses to regulate inflation—the Bank’s objective is to keep inflation at 2%—inflation and interest rates frequently move in the same direction.
The base rate is currently 4.5%; the next decision regarding interest rates will be made on June 22.
The idea behind rising interest rates is that if demand declines as a result of individuals spending less, inflation should also decline. The drawback is that borrowing costs increase.
The Impact of High Inflation
High inflation can have several adverse effects on the economy. It erodes the purchasing power of consumers, reduces their standard of living, and affects their ability to save and invest. Moreover, businesses face challenges in managing increased costs of input materials and may resort to raising prices for consumers. However, price increases need to be executed thoughtfully to prevent damaging customer relationships and depressing sales.
The Recent Decline in Inflation
The drop in inflation below double digits signifies a positive development for the economy. After a prolonged period of elevated inflation rates, this reduction provides a much-needed respite. The 1.4% decrease demonstrates a gradual stabilisation in prices, instilling confidence in both consumers and businesses. While it is essential to remain cautious, this decline suggests progress towards more manageable levels of inflation.
Implications for Consumers
For consumers, the decrease in inflation holds several potential benefits. As inflation subsides, the rising costs of goods and services may stabilise or even decrease. This can alleviate the financial burden on households, allowing them to stretch their budgets further. Consumers may experience an increase in their purchasing power and find it easier to meet their day-to-day expenses. Additionally, reduced inflationary pressures could potentially contribute to lower interest rates, making borrowing more affordable for individuals.
Implications for Businesses
Businesses also stand to benefit from inflation dropping below double digits. The decreased cost of input materials, coupled with the potential for improved consumer spending, can positively impact their profitability and growth prospects. As prices stabilise, businesses may find it easier to plan for the future, as they can anticipate more predictable costs and manage their pricing strategies more effectively. Moreover, with inflation easing, businesses can focus on investing in expansion and innovation, driving economic recovery.
Will inflation decline further?
Although it reached a 41-year high of 11.1% in October 2022, inflation is predicted to continue declining this year.
According to Andrew Bailey, governor of the Bank of England, inflation is expected to “fall sharply” starting in the early summer and continuing through the rest of 2023.
The cost of energy and food, which have been the main drivers of inflation over the past year, are just two of the numerous elements that influence the level of inflation, so this is not a given.
By the end of 2023, the Office for Budget Responsibility’s economists expect inflation to return to its pre-recession level of 2.9%.
The recent development of inflation dropping below double digits since August signifies a positive turning point for the economy. Understanding the causes and effects of inflation is crucial for comprehending the significance of this decline. Consumers can look forward to potential relief from rising costs, increased purchasing power, and improved financial stability. Meanwhile, businesses can benefit from more stable input costs, enhanced profitability, and greater opportunities for growth. It is important to note that the overall economic landscape remains dynamic, and vigilance is necessary to ensure sustained progress. Nonetheless, this shift offers optimism and a chance for a more stable and prosperous future.
Sources
- https://www.mirror.co.uk/money/breaking-inflation-falls-87-finally-30056954
- https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-inflation
- https://www.cnn.com/2021/11/13/economy/what-is-inflation-explainer/index.html
- https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation
- https://www.dailymail.co.uk/news/article-12107043/Inflation-set-FINALLY-fall-double-digits-time-August.html
- https://www.forbes.com/sites/qai/2023/01/12/inflation-records-biggest-drop-in-almost-3-years/
- https://www.yahoo.com/news/uk-inflation-falls-to-87-in-april-but-high-food-prices-persist-061842130.html?fr=sycsrp_catchall
