What is the UK inflation rate 2024? ONS January CPI and RPI explained - impact on cost of living and mortgages

Chancellor Jeremy Hunt said the ONS' inflation data, with the rate staying at 4%, showed the "plan is working".
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The UK inflation rate unexpectedly held steady in January 2024, the latest Consumer Prices Index (CPI) from the Office for National Statistics (ONS) has shown.

The annual rate of price rises stayed at 4%, the same as in December 2023, despite the predictions from economists that it was due to rise. This was mainly due to the drop in food prices, which was the first since September 2021.

ONS chief economist Grant Fitzner said: “Inflation was unchanged in January, reflecting counteracting effects within the basket of goods and services. The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May.

“Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years. All of these factors combined resulted in no change to the headline rate this month.”

As well as being good news for consumers, it will also be welcome news to Rishi Sunak’s Downing Street administration given the Prime Minister's pitch to voters is on economic competency. The Chancellor Jeremy Hunt said: "Inflation never falls in a perfect straight line, but the plan is working. We have made huge progress in bringing inflation down from 11%, and the Bank of England forecast that it will fall to around 2% in a matter of months.”

Labour's Shadow Chancellor Rachel Reeves said: “After 14 years of economic failure, working people are worse off. Prices are still rising in the shops, with the average household’s costs up £110 a week compared to before the last election. Inflation is still higher than the Bank of England’s target and millions of families are struggling with the cost of living."

Core inflation - a measure of price rises that strips out categories which tend to rise and fall a lot, like food and energy - remains high at 5.1%.

So, what exactly does the ONS CPI for July 2023 mean for you - and what does it mean for the cost of living crisis and mortgages?

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 4% means prices are 4% higher on average than they were in January 2023.

Put another way, the current rate means that something that cost an average of £1 last July is now pretty much 4p more expensive on average. If you go back to Janaury 2023, when inflation stood at 10.1%, a product priced at £1 was 10p pricier. Although this perhaps doesn’t sound too bad, if you scale it up to what is now a £60 supermarket shop, you were likely to be paying just over £51 for the same basket of food and drink two years ago.

So, this year’s figure has built on what was already a large increase in prices last year. Also, even though the latest figure is the same as December 2023's data, it still means prices are continuing to rise rapidly on average. At the same time, wages have only just managed to keep pace with the rate of price hikes.

It is also key to note that the inflation rate is an average for the UK economy. Some average prices in individual categories have risen well above the rate of inflation. For example, the inflation rate for olive oil has been whopping 41.5%.

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. Put simply, the pounds in our pockets aren’t stretching as far as they used to.

At its most basic level, Inflation is influenced by supply and demand. If demand outstrips supply, prices are likely to go up. There are several factors that reinforce this dynamic, 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
  • Wage increases: the Bank of England says above-inflation pay rises can embed price hikes as they can maintain high levels of demand
  • 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.

Why is inflation high?

There are several big reasons for why inflation has been so high. 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 and retaliatory sanctions from President Vladimir Putin have thrown energy and fuel supplies into doubt. This has sent global prices soaring as Russia is a major source of oil and gas (and the UK is especially reliant on imported gas).
  • Global post-Covid recovery: after countries restarted their economies in the wake of Covid-19 lockdowns, demand for fuel and energy surged - this started the inflation crisis but is now no longer present in the inflation data.
  • Brexit: the UK’s exit from the EU has created supply chain bottlenecks, reduced the supply of some goods and increased the country’s vacancy rate (which can drive wages higher as employers compete to recruit staff).

A lot of the reason why inflation has been falling, particularly in the last few months, is that most of these price hike drivers have dropped out of the data (largely because inflation is an annual measurement and their respective price shocks happened more than 12 months ago). The one that economists believe is continuing to linger in our data is Brexit.

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 then kick in from the following April. However, ministers are not legally bound to raise these national payments in line with inflation in this way.

CPI inflation also allows economists to make international comparisons. At present, the UK continues to be one of the worst-hit countries in the Western world.

However, the rate is not a perfect indication of inflation in the UK as it omits some key costs. For example, council tax - which will once again be hiked by almost 5% for millions of households in April - is not included in the CPI. It also does not include disparities between different socioeconomic groups (more on that below).

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.

Higher energy bills have been driving inflation (image: Getty Images)Higher energy bills have been driving inflation (image: Getty Images)
Higher energy bills have been driving inflation (image: Getty Images)

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 January 2024 fell from 5.2% to 4.9%.

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. Prices have been climbing at such a steep rate that wages have largely not kept pace, which means we all have less disposable income. And with the real-terms value of the pound having dropped, our savings have also been eaten into, which means anyone saving up for a deposit on a house is

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 that is 2% higher than that experienced by the tenth richest households. People on lower incomes are more adversely affected because they spend a greater proportion of their money on necessities, like food and energy. The think tank estimates food costs make up 14% of a poorer household’s income, compared to 9% for a richer household.

In the latest data, food inflation slowed down again - albeit to a still-high rate of 7%. . The fact that wages are growing, combined with high core inflation and rising services inflation, means interest rate-related costs could keep rising. The Bank of England has a target of keeping the country’s inflation to 2% - something it manages using these rates.

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. If the Bank believes inflation is likely to remain elevated due to the factors above, it will continue to hike interest rates. The base rate is currently at 5.25%.

What will the impact be on mortgages?

As inflation has a knock on affect on the Bank of England's base rate, it also has an impact on mortgage rates. Around 1.6 million homeowners are due to come off their fixed-rate deals this year, and will be looking at an significant increase in monthly payments.

Lenders did slash rates at the start of the year as part of a price war, however many have now pulled their lowest offers. George Sweeney, financial advisor at personal finance comparison site finder.com, said he didn't think the latest inflation data is "likely to have a significant impact on mortgage rates".

"Lenders might hang on a bit to see the lay of the land before making any notable moves, as they’ll be wary of jumping the gun before these inflation figures start to come down more significantly," he commented.

"Although CPI figures have come in softer than expected today, the BoE isn't going to be in a hurry to make cuts if the data isn’t heading in the right (downward) direction. However, the housing market has already proven to be remarkably resilient.

"People are digesting the reality that we’re unlikely to go back to an extreme, low interest rate environment. So there’s less incentive to delay a move or house purchase, especially with house prices looking like they might be starting to creep up."

Ralph Blackburn is NationalWorld’s politics editor based in Westminster, where he gets special access to Parliament, MPs and government briefings. If you liked this article you can follow Ralph on X (Twitter) here and sign up to his free weekly newsletter Politics Uncovered, which brings you the latest analysis and gossip from Westminster every Sunday morning.

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