What happens when inflation rises? Why UK rate increased to 2.5% in June 2021 - and what it means for economy

The UK inflation rate has risen from 0.7% in March to 2.5% in June, according to ONS figures

A rise in clothing, energy and petrol prices are driving the rate of inflation at present. (Pic: Shutterstock)
A rise in clothing, energy and petrol prices are driving the rate of inflation at present. (Pic: Shutterstock)

A rise in energy and petrol prices, coupled with the easing of lockdown restrictions, has seen the UK’s inflation rate more than double over the past month.

Figures released from the Office for National Statistics (ONS) show that inflation rose from 2.1% in May 2021 to 2.5% in June 2021, up from 0.7% in March 2021.

Sign up to our Money Savers newsletter

The i newsletter cut through the noise

Shops, hairdressers and pub beer gardens were all allowed to reopen from 12 April as measures used to limit the spread of Covid were steadily scaled back.

Further relaxing of lockdown rules came into effect from 17 May, with economists forecasting the inflation rate to rise again as people continue to spend pent-up savings.

Read More

Read More
Why is crypto down today? Cryptocurrency market crash explained

What is inflation?

Inflation is a word used by economists to describe the sustained rise in prices of goods and services within a country over a set period of time.

Inflation rates vary all the time in response to external factors such as the price of oil, which has risen of late as lockdown restrictions ease under the government’s roadmap.

The ONS releases regular updates on the UK’s inflation rate, which has been brought into focus since the Covid pandemic hit, for people to assess living costs and make changes.

As inflation rates increase so does the cost of living, meaning the value of currency decreases.

Why is inflation going up?

Latest ONS figures show the UK inflation rate increased from 2.1% in May 2021 to 2.5% in June 2021.

It says the rise was brought on mainly by dearer food, secondhand cars, clothing and footwear and fuel prices, after an increased demand brought on by lockdown easing.

The June rise is higher than expected, above the Bank of England 2% target and the highest since August 2018 when it hit 2.7%.

Why did the UK inflation rate double in March to April?

ONS figures show the UK inflation rate increased from 0.7% in March 2021 to 1.5% in April 2021, brought on by an easing of lockdown measures and consumer spending.

Since the pandemic hit in March 2020, the inflation rate dropped to little more than 0.1% as restrictions were enforced on daily lives curbing people’s expenditure in many sectors.

With limited demand for goods and services, due to various social restrictions enforced to keep the virus from spreading, inflation rates stayed low to encourage spending where possible.

As restrictions ease, helped by the Covid vaccine rollout and lower hospital admissions, shops and businesses are reopening for consumers to spend and satisfy pent-up demand.

A rise in clothing, energy and petrol prices are driving the rate of inflation at present.

What happens when inflation rises?

The inflation rate is forever changing.

When the inflation rate goes up, goods and services cost more and the money in consumers’ pockets doesn’t stretch as far, resulting in an increase in the cost of living generally.

This is seen as a good thing, to a degree, by some economists who think a moderate rate of inflation encourages people to spend what they have today rather than see its value decrease.

The theory is based on people’s temptation to buy today outweighing the thought of seeing your money diminish in value over time as inflation rises and the cost of a cup of coffee increases.

It all contributes towards a healthy economy where people are spending money to create more demand for goods and services, and in-turn maintaining supply chains and employment.

The Bank of England expects UK inflation to hit 2.5% towards the end of 2021, above its 2% target, before the rate gradually levels out over 2022 and 2023.