What is inflation? Meaning of economics term, October 2021 UK cost of living rate and 2022 forecast explained

UK inflation has risen by the highest rate in almost 10 years, according to ONS figures

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

UK inflation has risen by the highest rate in a decade.

Latest figures from the Office of National Statistics (ONS) show that inflation rose by 4.2% in October 2021.

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The increase has been attributed to the continuing rise in fuel and energy costs, which is putting pressure on household finances.

It is the first ONS assessment of the cost of living since chancellor Rishi Sunak’s Autumn Budget, where he predicted inflation will average more than 4% in 2022.

Mr Sunak told MPs in the House of Commons that he had written to the governor of the Bank of England to reaffirm a remit “to achieve low and stable inflation”.

“People should be reassured they have a strong track record in doing so,” said Mr Sunak. “I understand people are concerned about global inflation – but they have a government here at home ready and willing to act.”

Here’s all you need to know about inflation.

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 by 4.2% in the 12 months to October 2021.

This is up from 3.1% in September 2021 and sees a 3.5 percentage point rise from October 2020 when the inflation rate was 0.7%.

There has been an increase in prices to clothing and footwear, housing and household services, recreation and culture, and furniture and household goods, say the ONS.

Why is UK inflation rates on the up?

Rishi Sunak told MPs global factors since the Covid pandemic had during his Autumn Budget 2021, touching on wholesale gas prices and petrol problems at the pump.

He said: “But where the government can ease these pressures, we will act.

“We’ve already suspended the HGV levy until August and I can do more today extending it for a further year until 2023, and freezing Vehicle Excise Duty for heavy goods vehicles.”

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 5%, above its 2% target, before the rate gradually levels out over 2022 and 2023.

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