The yardstick for how much prices are rising across the UK economy dropped from a 41-year high of 11.1% in October to 10.7% in November and 10.5% in December. It is a crucial marker for understanding how severe the ongoing cost of living crisis has become.
It appears to confirm predictions from the Bank of England and other economists that the inflation crisis has peaked - although cost of living issues are set to be with us well into 2023. Increasing interest rates and a likely recession are both set to squeeze incomes and damage the economy, while prices are still set to continue growing at a big rate until at least the middle of 2023.
So, what does the ONS CPI for December 2022 tell us - and what does it mean for the cost of living?
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 10.5% means prices are 10.5% higher on average than they were in December 2021.
All western countries use inflation to track how their economies are performing. If the rate is high - as it currently is - 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.
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 global 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 - although this is now less of a factor in the inflation rate
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 remain high before slowly falling back over the next two years. Even when it falls back, it’ll still mean the cost of living is higher than it was before the crisis and - given the prospect of a recession - wages will struggle to catch up for at least 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.
The September CPI is used by the government to determine levels of state support, including benefits and the state pension, which will kick in from the next financial year in April. However, ministers are not legally bound to raise these national payments in line with inflation, which means the UK’s poorest people could face a real-terms cut next year.
Inflation as measured through the CPI also allows economists to make international comparisons. As of December 2022, the CPI rate was 10.5%, meaning the UK continues to be one of the worst-hit countries in Europe.
In essence, this figure means that something that cost an average of £1 last December is now 10.5p more expensive on average. However, some average prices have risen well above this rate. For example, NationalWorld has discovered that supermarket value ranges have risen in price at a steeper rate than inflation in 2022.
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 - especially in 2022 - although prices are now on the way down again. The RPI for December 2022 was 13.4%.
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 at a higher rate - 12.5% in October - compared to an estimated rate of 9.6% 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 fall in inflation in December was motor fuels, with the average petrol price down by 8.3 pence per litre month-on-month in December.
But at the same time, continuing food price hikes mean people are being hit on their everyday supermarket shop. The price of groceries up by an average of 16.8% in December, up from 16.4% in November - the highest inflation rate since the 1970s. Milk, cheese and eggs led the way, while pasta and flour also steeply climbed in price.
Increases in dairy prices had already been forecast by major supplier Arla earlier in 2022, and arguably first became noticeable in supermarkets when the price of its brand Lurpak soared.
High inflation has also meant that real-terms wages have been eroded. The Bank of England has a target of keeping the country’s inflation to 2% - something it manages using interest rates. It does this because its job is to keep the value of the pound at stable levels. The current rate of inflation is eroding its value.
Keeping inflation at 2% 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 remaining very high 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.