The UK inflation rate rose unexpectedly in February 2023, the latest Consumer Prices Index (CPI) figures from the Office for National Statistics (ONS) show.
The rate of annual price rises was 10.4% higher last month than it was in February 2022 thanks in part to food price inflation hitting a 45-year high, with shortages of key vegetables in supermarkets playing a part in the surge. Clothing and footwear as well as restaurants and hotels were also responsible for the increase.
After consecutive falls since a 41-year high of 11.1% was recorded in October, economists had expected the rate to continue to decline throughout 2023 - particularly given inflation was so high last year. After the Spring Budget, the Office for Budget Responsibility (OBR) - the independent public watchdog for the nation’s finances - said it expected the rate to fall to 2.9% by the end of the year.
Indeed, Rishi Sunak and Jeremy Hunt have staked their reputations on inflation falling this year - Sunak having pledged to halve inflation in 2023. The government only has limited powers to influence the rate and arguably played its only real card in the Autumn Statement when it significantly hiked taxes.
It all comes as the UK braces itself for a further squeeze to household budgets in April, when several price hikes are due to come into effect. Council tax, water bills and mobile phone deals are all set to get more expensive - although Chancellor Hunt delayed an increase to energy bills in his Budget.
So, what does the ONS CPI for February 2023 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 10.4% means prices are 10.4% higher on average than they were in February 2022.
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 hikes can see spending fall, which can reduce prices
The ONS publishes updates on the UK inflation rate every month. These figures have been in the news a lot over the past year because inflation has been climbing at a steep rate - although it is now coming down again.
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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 has been 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.
- Brexit: with the UK’s exit from the EU creating supply chain bottlenecks, reducing the availability of goods and increasing the country’s vacancy rate to growth-inhibiting levels, Brexit has been responsible for at least some of the inflation we are seeing (although economists say it is hard to measure its full impact).
Economists expect inflation to gradually fall back over the next 12 months year, largely as a result of how the statistic is measured. For example, by the time October comes around, it’s unlikely there will be another significant hike on top of the 11.1% recorded in that month in 2022. With the latest statistic for February 2023, it should be viewed as a 10.4% annual increase in the rate of price rises on top of a 6.2% annual inflation rate recorded in February 2022.
So, even when the rate falls back, it’ll still mean the cost of living is higher than it was before the crisis - particularly given wages have not maintained pace with inflation.
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 February 2023, the CPI rate was 10.4%, 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 10p more expensive on average. However, some average prices have risen well above this rate. For example, NationalWorld has found more than 150 value food products in supermarkets had their prices hiked in February.
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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. The RPI for February 2023 climbed to 13.8% having been flat at 13.4% for the previous two months.
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 progressive think tank the Resolution Foundation, the situation is even worse for the UK’s poorest tenth of households as they have seen inflation rise to a higher rate - 12% in February - compared to an estimated rate of 9% for the richest.
Therefore, the gap between these two groups has now grown to 3.5 percentage points. 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 February’s unexpected inflation rise was food and drink prices, which soared to their highest rate since August 1977. The rate of 18.2% was a 1.4 percentage point rise month-on-month, with the ONS saying an increase in the rate of vegetable prices (+18%) may have been down to the food shortages seen in supermarkets in recent weeks. It also suggested rocketing energy bills for producers may have contributed to the hike.
Other key items, including bread (20.8%), meat (16.3%) and fruit (7.7%), all registered increases. However, milk, cheese and eggs - which have been leading food price rises over the last year - saw the rate of price rises decrease. These dairy items are still more than 30% more expensive than a year ago, thanks to the war in Ukraine, which has forced up the cost of the feed, fuel and energy farmers need to raise their herds.
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Clothing and footwear also recorded a major increase, with prices rising an average of 2.5% between January and February to an annual rate of 8%. While price rises are normal in this category at this time of year due to the introduction of new stock after the January sales, the monthly rise was the highest for 11 years.
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 the UK is expected to see a decline in its GDP over the coming year.