The cost-of-living crisis is by no means news to the average household. After two years of hiked costs from central heating to the weekly shop, nine in ten of us have been negatively impacted – and one in eight of us are teetering on the edge of financial collapse. The personal and individual impacts of the cost-of-living crisis have been palpable, but personal experiences often feel divorced from the big-ticket decisions made at the top of the food chain.
Between confusing reports, obtuse and combative government policies, and seemingly contradictory decisions-making from the Bank of England, the cost-of-living crisis seems like a crisis without an end. But there are simple mechanisms behind high rates of inflation – and simple consequences, too. How is it that inflation rates are impacting other areas of like, and how are they being addressed?
The Rate of Inflation
First, it is important to understand exactly what the rate of inflation is. The rate of inflation is simply a number that summarises the movements of certain prices into a single statistic. In this way, the rate of inflation is a reflection of the economy just as much as a factor in its movements.
The most common inflation rate cited in news publications is the CPI, or the Consumer Prices Index. The CPI rate is built from the price movements of thousands of consumer goods, collated and averaged to give an overall percentage movement. The percentage given describes annual movement; where the CPI rate was 4.6% in October 2023, this means prices have risen by 4.6% in the past 12 months.
Rates of Interest
When we talk about the economic impacts of high inflation, what we are really talking about is decisions and responses to it – and one of the most-felt responses comes in the form of shifting interest rates. The Bank of England has independent executive control over currency and interest rates, and can use them to economic ends.
As inflation rises, the BoE is incentivised to rise interest rates. Higher interest rates make borrowing more expensive, with a posited cooling impact on the economy. The less money is borrowed and exchanged; the less price inflation is likely to occur. This has had positive impacts in some areas, with personal savings accounts enjoying uprated interest – creating more returns for savers.
However, it has also had deleterious impacts with respect to the property market, where high interest on mortgages has made property ownership even less possible for first-time buyers (and may have contributed to an upcoming property market crash).
Additional Impacts
Other decisions have been made in relation to high rates of interest, with their own economic impacts. Pressure from the UK’s working population in the wake of increased domestic overheads, for example, has led many employers to increase salaries. As a result, the average wage in the UK grew by 7.9% (albeit, only representing a real-terms increase of 1.3%).