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What is the UK inflation rate and why is the cost of living rising?

Man checking out goods in a supermarketImage source, Getty Images

Prices are rising faster than they have done for 40 years.

The increase in the cost of living is putting a squeeze on people's finances, as incomes fail to keep up.

What is inflation?

Inflation is the increase in the price of something over time.

For example, if a bottle of milk costs £1 and that rises by 5p compared with a year earlier, then milk inflation is 5%.

Every month a figure is released, estimating how much prices are rising overall - it's currently at 9.4%.

Why are prices rising so fast?

Many things are contributing to the high rate of inflation, including:

  • Energy bills, which have risen rapidly because of high oil and gas prices. They're expected to increase sharply again from October
  • Petrol and diesel prices, partly because the war in Ukraine has driven up the cost of crude oil. Prices recently fell from record levels but are expected to remain high
  • Food prices, as the war in Ukraine squeezes grain production and costs
  • The cost of used cars has also risen and is contributing to inflation, the Office for National Statistics (ONS) says
  • The costs of raw materials, household goods, furniture and restaurants and hotels has risen
  • Higher interest rates make mortgage payments more expensive for some homeowners

Not all prices behave the same way. So, the cost of some things has grown a little or stayed the same, but for others it has rocketed upwards.

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What's happening to wages?

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

Average wages, not including bonuses, rose by 4.3% between March and May, the ONS says.

But when you take inflation into account, regular pay actually fell by 2.8% compared to 12 months ago.

Pay including bonuses was down 0.9% when adjusted for inflation.

Unions say wages should reflect the cost of living - but the government argues this could push inflation even higher.

Who measures the UK's inflation rate?

To come up with an inflation figure, the ONS keeps track of the prices of hundreds of everyday items. This is known as the "basket of goods".

The basket is constantly updated. Tinned beans and sports bras were added this year, reflecting a rising interest in plant-based diets and exercise.

Each month's inflation figure shows how much these prices have risen since the same date last year. This is known as the Consumer Prices Index (CPI).

Image source, Getty Images

What's happening in other countries?

Other countries are also experiencing a cost of living squeeze.

The same reasons are often involved - increased energy costs, shortages of goods and materials and the fallout from Covid.

In the eurozone, the latest estimate of annual inflation was 8.6%.

In the United States, inflation hit 9.1% in the 12 months to June - a 40-year high, the US Labor Department said.

When will inflation come down?

Despite predicting that inflation will go higher in the autumn, the Bank of England says the "current high rates of inflation are not likely to last".

It forecasts inflation will peak this winter - then come down to be close to 2% in about two years.

But not all economist are so sure. Historically, when inflation has risen above 9% it has taken years, not months, to recover.

What can be done to tackle inflation?

The Bank of England's traditional response to rising inflation is to raise interest rates. This can encourage people to save, but means some people with mortgages see their monthly payments go up.

Raising interest rates also makes borrowing more expensive and - it is hoped - people have less money to spend. As a result, they will buy fewer things and prices will stop rising as fast.

But when inflation is caused by things like rising energy prices worldwide, there is a limit as to how effective UK interest rate rises can be in slowing inflation.