UK inflation dropped to 8.7% in April 2023, largely thanks to stable energy prices, the ONS Consumer Prices Index (CPI) has shown.
With increases to gas and electricity bills not matching the huge 54% rise seen under the Ofgem energy price cap in April 2022, the rate of prices rises has been deemed to have fallen for energy. But the headline figure still means prices are rising rapidly - particularly in sectors like food, where costs are continuing to soar at a rate of 19.3%.
The decline is also not quite the good news it appears to be at first glance. Firstly, economists had been anticipating a larger fall to somewhere in the region of 8.2%. Secondly, core inflation - a measure of price rises that cuts out volatile categories, like energy and food - has gone up, rising from 6.2% to 6.8% between March and April.
It means the Bank of England, which follows core inflation closely, looks likely to hike interest rates again in June. This sticky inflation also jeopardises Rishi Sunak’s pledge to halve inflation by the end of 2023 (a promise he had little control over anyway).
But how is inflation calculated - and what exactly does high inflation mean for you?
What is inflation?
Inflation is an economics term for the rate of price rises across the economy. Price rises tend to come about when demand outstrips supply, with key drivers of the current crisis including, the price of oil, supply chain disruption, Brexit-related labour shortages and low product availability.
Essentially, anything that hikes the cost of creating a product and getting it from A to B is likely to increase inflation. For example, the rate of inflation for vegetables rose to 19.9% from 19.3% between April and March - a rise that’s come about as a result of shortages in Europe and high energy costs leading to a lack of production in the UK.
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Many of the factors behind our high inflation rate are related to the Russia-Ukraine war given both countries are key suppliers of vital commodities, like gas and wheat. Food prices have been hit particularly hard by the conflict, although this does not entirely explain the above-inflation hikes NationalWorld has recorded in supermarket value ranges over the past year.
Sharp rises in inflation, like the one seen for food items, can severely impact the cost of living and see consumers opt to reduce their spending - especially on luxury goods and services. Overall, this is bad news for the economy, which is already struggling to grow.
When inflation is at a much lower level, it is seen by most economists as a good thing. They believe it encourages shoppers to spend rather than run the risk of seeing the value of their money decrease. The Bank of England, which aims to control inflation by using interest rates, has a target of keeping the rate of price rises to 2%.
The thinking is that this contributes towards a healthy economy, where people spend their cash and create more demand for goods and services by doing so, which maintains supply chains and employment. If there was deflation, it is believed consumers would not feel the need to spend as much right away because their purchasing power could extend further in the future.
One key thing to note with inflation is that even if the rate is going down, prices are still rising on average. Given prices were already rising this time last year, the percentage increase you see today should be viewed as being in addition to the percentage increase recorded last year (9% as of April 2022).
Also, as the headline inflation figure is an average, some categories will be recording bigger price rises, while others will be seeing lower ones (or even deflation). For example, while olive oil is 46.4% more expensive, petrol has gone down in price by 9.9%.
Any decline in the inflation rate can also be down to the way it is calculated. Given the headline rate is an annual comparison, when any major price shocks move out of the 12-month window of measurements, the rate is likely to go down. This is why inflation fell so sharply in April - the Ofgem energy price cap increase of April 2022 was not matched by the bill increases of April 2023.
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Research has indicated that the cost of living has risen much more for those on the lowest incomes. Analysis by progressive think tank the Resolution Foundation has found the poorest tenth of the UK population are seeing price rises that are 2% higher compared to the country’s wealthiest tenth, as they tend to spend a greater proportion of their income on basic necessities.
How is inflation calculated?
The UK has two mechanisms for calculating inflation which are worked out by official statistics body the ONS every month. This data not only allows people to make informed decisions about their spending habits but it is also used to set state handouts, like pensions, benefits and statutory sick pay.
CPI
The most important measure of inflation in the UK, and internationally, is the CPI. Used as the UK’s official inflation yardstick, it’s worked out by measuring the price of a typical ‘basket’ of goods and services we use in our everyday lives.
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This basket includes everything from the price of a loaf of bread to how much an e-book costs and is determined by the annual Family Expenditure Survey, which is completed by 6,000 people and determines the percentage of people’s incomes that are spent on different things. It changes every year, with items added or taken away to better reflect current shopping habits.
This list often provides a fascinating insight into UK social trends. For example, in 2023, E-bikes, home security cameras and frozen berries have all been added, while non-Top 40 CDs, alcopops and digital cameras have been removed.
The ONS weights each product or service category depending on its importance to the average person’s budget. It means things that are integral to our lives, like food, have more of a bearing on the CPI rate than luxuries, such as alcohol.
In all, the ONS gathers 180,000 individual prices for more than 720 consumer goods and services every single month. These prices are collected in roughly 140 locations across the UK, as well as from the internet and over the phone.
Percentage increases in price are then multiplied by the weighting the particular product category has been given, which gives us a picture of how much of an impact it is having on consumer budgets. The September edition of the CPI tends to be especially important because the government uses it to judge how much state benefits should increase from the next financial year.
The ONS also calculates a version of the CPI that includes home owner occupier costs and council tax (CPIH). While it is a more comprehensive measure of overall inflation, it masks day-to-day consumer price changes because housing is given a huge weighting. It also makes it harder to make international comparisons, as the UK’s housing system is very different from those in other countries.
RPI
Alongside the CPI, the ONS also calculates inflation through the Retail Prices Index (RPI). However, it is not used for official purposes as, by international standards, it is seen as an inferior measurement to the CPI.
The reason why it is still calculated is because it provides a historical yardstick for how UK inflation has changed. This is because it was used for much of the twentieth century. RPI is still used to determine some UK prices, for example train tickets, mobile phone bills and some taxes, like alcohol duty. It fell to a rate of 11.4% in March 2023.
What does the current CPI mean?
The CPI rate was 8.7% in April 2023. What this means in practice is that the average price of goods and services cost 8.7% more than in April 2022. In real terms, an item that cost £1 last year now costs an average of £1.09 (when we round the figure up).
Ultimately, it means the purchasing power of the pounds in your pocket has diminished significantly since last year. This level of inflation builds on what was already a high rate of 9% in April 2022.