Inflation shows how the price of goods and services has changed over time – and it has an impact on whether the Bank of England decides to cut interest rates
UK inflation has risen further above the Bank of England target.
Inflation rose to 2.6% in the 12 months to November 2024, up from the 2.3% that was recorded in October. It was marks the second month in a row where inflation has crept back up – and it comes just one day before the Bank of England announces its latest interest rates decision.
The Bank of England – which has a target of 2% inflation – is widely expected to pause interest rates at 4.75% tomorrow, partly due to a jump in wage growth. At its highest point, interest rates were at 5.25% but a drop in inflation had sparked two rate cuts in recent months.
Inflation had been steadily coming down in recent months and fell to 1.7% in September, its lowest level in three years. It started to rise again in October after the Ofgem energy price cap went up again. The Office for National Statistics (ONS) releases inflation data every month.
Grant Fitzner, chief economist at the ONS, said: “Inflation rose again this month as prices of motor fuel and clothing increased this year but fell a year ago. This was partially offset by air fares, which traditionally dip at this time of year, but saw their largest drop in November since records began at the start of the century.”
What is inflation?
Inflation shows how the price of goods and services has changed over time, with the Consumer Price Index (CPI) being the primary measure of inflation. The ONS tracks a regularly updated “basket of goods” and services that represents what households are buying. However, the main CPI figure you see in headlines is used to represent an average.
This means the individual prices of some goods may be higher or lower than this main figure. When inflation is lower, it does not mean prices have stopped rising – it just means they’re going up at a slightly slower rate than before. For example, the rate of inflation is now at 2% – so this means an item that cost £1 last year would now cost £1.02.
How is inflation linked to interest rates?
The Bank of England increased interest rates over the course of almost two years to try and lower inflation. The base rate influences the interest rate you’re offered by banks and lenders – so when it is higher, borrowing becomes more expensive and this means people have less money to spend elsewhere. When people spend less money, this brings down demand and lower prices, which should then lower inflation.
But a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched. The base rate stood at just 0.1% in December 2021. It reached a peak of 5.25% in August 2023. It was finally cut to 5% in August 2024, with a further cut to 4.75% confirmed in November 2024. The next base rate decision is due on December 19.
Why did inflation peak?
Inflation began to rise in 2021 largely due to higher costs of energy and food. Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine. The war also pushed up food prices, due to rising costs for fertilisers and animal feed. Both energy and food price rises have come down in recent months, although they are still higher than before.
