What is the UK inflation rate 2024? Latest CPI explained - impact on interest rate, cost of living & mortgages

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UK inflation has dropped to the Bank of England’s 2% target, the latest Consumer Prices Index (CPI) has shown.

The annual rate of price rises fell to 2% for the month of May, the lowest level in almost three years. However, financial markets pushed back expectations for immediate interest rate cuts after the figures, amid concerns over persistent services inflation. There is hope the base rate may come down later in the summer.

This was mainly due to a significant drop in food prices, which are at their lowest level for more than two years. At one stage food inflation reached nearly 20%, in March last year, but has been steadily easing back since then. However, last month saw prices rise at the petrol pumps, while air fares also lifted, according to the ONS.

Suren Thiru, economics director at Institute of Chartered Accountants in England and Wales (ICAEW), said: “Despite this landmark fall in inflation, concerns over both underlying price pressures and changing policy in the run-up to a General Election means a June interest rate cut is almost certainly off the table.”

Rishi Sunak said the economy has “turned a corner” in response to the latest figures. He said: “When I became Prime Minister, inflation was at 11%. But we took bold action. We stuck to a clear plan and that’s why the economy has now turned a corner.

Labour's Shadow Chancellor Rachel Reeves said: “After 14 years of economic chaos under the Conservatives, working people are worse off. Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high. Labour has a plan to make people better off bringing stability back to our economy, unlocking investment and delivering reform.”

So, what exactly does the ONS CPI for May 2024 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 2% means prices are 2% higher on average than they were in May 2023.

Put another way, the current rate means that something that cost an average of £1 last July is now over 2p more expensive on average. If you go back to March 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.

ONS chief economist Grant Fitzner explained: "In terms of overall inflation trends, I think it’s worth pointing out that obviously prices are still going up, they’re still higher than they were a year ago or two years ago, (but) the rate of inflation has come down markedly."

So, this year’s figure has built on what was already a large increase in prices last year. Even though the latest figure has gone down, 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 a 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

Why has inflation been so 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. Over the last year, the UK has been 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 once again 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) | 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 April 2024 fell from 3.3% to 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 24 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 to 1.6%, the first time it has dropped below overall inflation for more than two year. The fact that wages are growing, combined with high core inflation and rising services inflation, means interest rate-related costs stay high. 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.

Experts reacting to the latest figures pointed out that the higher-than-expected services inflation figure could have an impact on when the Bank of England decides to cut UK interest rates. George Sweeney, investing expert at personal finance comparison site finder.com, said he still believes that the Bank of England will wait until later in the year to cut interest rates.

He commented: “These figures should offer a glimmer of hope to mortgage holders whose household budgets have been squeezed over the last couple of years by crippling borrowing rates, as indicators continue to point towards an incoming base rate cut. However, if the Bank does decide to bring the base rate down in the August meeting, I don’t think it’s likely to be by much.

“Particularly, because the Bank has predicted a possible inflation spike up to 2.5% later this year. And, with all the hard work getting to this point, the Bank will be cautious about triggering further inflationary spikes if they appear to be overzealous."

Nathan Emerson, CEO of Propertymark, was more optimistic, saying: “With inflation now back down to the levels initially targeted, Propertymark is extremely keen to see this now inspire a drop in interest rates when the Bank of England Monetary Policy Committee meet tomorrow. Since the start of the year, we have witnessed many hints that rates may see a cut midyear and we now want to see this all click into place, with lenders bringing a new raft of competitive mortgage at the first opportunity.”

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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