What is the UK inflation rate? August 2022 CPI and RPI explained - what rate means for UK cost of living

The latest data from the Office for National Statistics (ONS) showed that while average fuel prices dropped, food costs continued to rocket

The UK inflation rate has dipped for the first time since September 2021s, the latest CPI figures from the Office for National Statistics (ONS) show.

It means the rate of price increases slowed, falling 0.2 percentage points from the 10.1% recorded in July 2022.

Despite this slight deceleration, inflation is expected to surpass its 40-year high later in 2022, with Bank of England forecasts suggesting it will peak at more than 13%.

Price rises have affected a number of key items (image: Getty Images)

The extent to which Liz Truss’s Energy Price Guarantee may impact the growth in inflation remains unclear.

So, what exactly do the latest inflation figures mean - and what does it all mean for the cost of living crisis?

What does inflation mean?

Inflation is an economics measure that shows how much the price of goods and services have risen over a set period of time.

In the case of the CPI, the headline time period used is a year - so the figure of 9.9% means prices are 9.9% higher on average than they were in August 2021.

All western countries use inflation to track how their economies are performing.

Prices could rise at supermarket checkout after retailers were told to change packaging under a newly-introduced law. (Credit: Getty Images)

If the rate is high - as it is at present - it means the cost of living is likely to be rising for people across the UK, which means the value of money is likely to be decreasing.

So, in essence, most of us are poorer than we were a year ago.

Rates of inflation constantly shift as a result of several factors, the most important of which include:

  • Oil prices: higher oil prices make goods more expensive because it costs more to get them from A to B
  • Energy prices: higher energy prices make it more expensive to produce goods and services
  • Government policies: major tax cuts can increase spending, which can drive up prices

The ONS publishes updates on the UK inflation rate every month.

These figures have been in the news a lot so far in 2022 because inflation has been climbing at a steep rate.

Loading....

Why is inflation so high?

There are several big reasons for why inflation is so high at the present moment.

These include:

  • The war in Ukraine: global food prices have been driven up as Ukraine is a major producer of important ingredients, like grain and sunflower oil.
  • Sanctions against Russia: western sanctions against Russia, such as the UK oil ban, and resulting retaliation from President Vladimir Putin have thrown energy and fuel supplies into doubt. This has sent prices soaring as Russia is a major exporter of oil and gas to Europe.
  • Global post-Covid recovery: As countries have restarted their economies after emerging from Covid-19 lockdowns, demand for fuel and energy has surged.

Given the Russia-Ukraine war is likely to continue for some time and there is no immediate solution in sight for the global energy crisis, inflation is expected by economists to continue to worsen before slowly falling back over the next two years.

What are CPI and RPI?

The ONS has two main measures for inflation - the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

The CPI has been the official measure since 1996 and is calculated using a typical basket of goods and services that the UK frequently consumes.

This basket is weighted so that goods that are important to most households, like milk, have a greater influence over the headline inflation figure than luxuries, such as smart watches.

It’s used by the government to determine levels of state support, including benefits and the state pension, and also allows economists to make international comparisons.

As of August 2022, the CPI rate was 9.9%.

It means that something that cost an average of £1 last June is now 9.9p more expensive on average.

However, some average prices have risen well above this rate.

For example, NationalWorld has discovered that supermarket value ranges rose in price at a steeper rate than inflation in 2022.

Loading....

RPI was the official yardstick for inflation during the 20th century, and is now calculated so that the UK can see how current rates compare historically.

But it is still used to determine how prices should change for important things like train tickets and phone contracts.

It tends to track higher than CPI because it includes mortgage interest payments.

This means it is impacted by house prices, which have been rising for many years but have accelerated during the Covid pandemic.

The RPI for August 2022 remained unchanged at 12.3%.

What does current inflation mean for cost of living?

Whichever yardstick is used, both the CPI and RPI show that the UK cost of living has generally become much more expensive over the last 12 months.

According to the Resolution Foundation, the situation is even worse for the UK’s poorest tenth of households as they have seen inflation climb 10.6% in August compared to an estimated rate of 9% for the richest.

These vulnerable people are more adversely affected because they spend a greater proportion of their income on key items, including food and energy.

The ONS says the main reason for the slight dip in August’s inflationary growth was falling pump prices for diesel and petrol.

Diesel prices grew at 36.2% in August 2022 - down from 46.1% in July - while the cost of petrol grew 30.2% compared to 42.9% the previous month.

Overall, these knocked 0.33 percentage points off the CPI.

(Photo: ANTHONY DEVLIN/AFP via Getty Images)

But while the cost of a tank of fuel eased in August, food and drink prices continued to accelerate.

They jumped 13.1% on average (July’s rate was 12.6%), with low fat milk (40.4%) contributing the single biggest rise.

Butter (29.5%) and whole milk (29.4%) posted the next biggest increases.

Loading....

High inflation has also meant that real-terms wages have been eroded by a record amount.

The Bank of England has a target of keeping the country’s inflation to 2% - something it manages using interest rates.

This lower level of inflation is viewed as a good thing by many economists, as they believe it encourages people to spend what they have today, rather than see it go up in price tomorrow.

The argument is that this behaviour contributes towards a healthy economy, where people spend money in a sustainable way, which creates more demand for goods and services and - in turn - maintains supply chains and employment.

However, with inflation currently very high - and expected to go higher this year, before coming back down in 2023 - it means people are less likely to spend their hard earned cash on anything other than the basics.

In part, this is why there are predictions the UK could face a recession - i.e. two successive quarters of 0% or negative economic growth.