UK inflation tumbled back into single-digits in April 2023, according to the latest Consumer Prices Index (CPI) from the Office for National Statistics (ONS).
The annual rate of price rises dropped 1.4 percentage points to 8.7% - the first time inflation has not been in double-figures since August 2022. The fall came as a result of energy prices not climbing to the same extent they did in April 2022. It could be good news for Rishi Sunak, who has pledged to halve inflation in 2023 (a promise that is not entirely in his gift to make).
But at the same time, food prices continued to soar rapidly - albeit at a rate of 19.3% instead of the record 19.6% seen in March’s figures. Core inflation - a measure of price rises that strips out categories which tend to rise and fall a lot, like food and energy - actually increased from 6.2% to 6.8%.
Although headline inflation has dropped, it has not gone down by as much as economists had hoped. The Bank of England had expected a rate of around 8.2%. The UK’s central bank is also likely to be concerned by the rise in core inflation, which is one of the key metrics it uses when setting interest rates. It opens the door to another rates hike in June - something that could spell misery for millions of mortgage payers.
So, what exactly does the ONS CPI for April 2023 mean for you - and what does it 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 8.7% means prices are 8.7% higher on average than they were in April 2022.
Put another way, the current rate means that something that cost an average of £1 last April is now pretty much 9p more expensive on average. If you go back to April 2022, when inflation sttod at 9%, a product priced at £1 was 9p pricier. So, this year’s figure has built on what was already a large increase in prices from last year.
It is also key to note that the inflation rate is an average for the UK economy. Some average prices on individual goods have risen well above the rate of inflation. For example, NationalWorld has found supermarket value range food prices have risen by an average of 23% over the past 12 months.
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 are 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 so high?
There are several big reasons for why inflation is so high at the 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 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).
Economists expect inflation to gradually fall back in 2023, mostly as a result of how the statistic is measured. Given how high inflation has been, the comparitive figures for the following year are likely to be much lower.
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. The latest statistic for April 2023 should be viewed as an 8.7% annual increase in inflation on top of a year-on-year rise of 9% recorded in April 2022.
So, even when the rate falls back, it’ll still mean the cost of living is higher than it was before the cost of living 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 in this way.
Inflation as measured through the CPI also allows economists to make international comparisons. As of April 2023, the CPI rate was 8.7%, meaning 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 was hiked by almost 5% for millions of households in April - is not included in the CPI.
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 April 2023 fell from 13.5% to 11.4%.
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. Prices have been climbing at such a steep rate that wages have 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.
The ONS says much of the reason for April’s fall in inflation was energy prices. Given costs did not increase by the same amount as they did in April 2022 when the Ofgem energy price cap soared 54%, the inflation figure has become much lower. Electricity is still 17.3% more expensive compared to last year (down from a rate of 66.7% in March), while gas is 36.2% pricier (down from 129.4% last month).
Although its rate reduced slightly, food price hikes remain close to the 45-year highs seen in March, with several key categories still showing inflationary increases. Pork (27.2%), pasta (27.7%) and vegetables (19.9%) all saw their rates rise. The latter of these is likely to be down to the continued impact of the supermarket shortages seen earlier in 2023.
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 such weak GDP growth in 2023.