Inflation in the UK hit 3.4% in February 2024, the lowest rate since September 2021. Nevertheless, this remains above the Bank of England’s 2% target. Also, the central Bank may soon cut interest rates.
What does UK inflation in February 2024 mean?
Inflation is the increase in the price of goods over time. For example, if a milk bottle costs £1 but is £1.05 a year later, then annual milk inflation is 5%.
How is the UK’s inflation rate measured?
The Office for National Statistics (ONS) tracks the prices of hundreds of everyday items, including food and fuel.
This “basket of goods” is regularly updated to reflect shopping trends. For instance, vinyl records and air fryers were included in 2024, and hand sanitizer was removed from the list.
In addition, the ONS examines price changes over the previous 12 months to calculate inflation.
The primary inflation measure is the Consumer Price Index (CPI).
One reason CPI fell to 3.4% in February was a surge in petrol & diesel costs, which offset a drop in food price inflation.
Why do Prices Still Surge?
Soaring food & energy bills were the leading causes of the UK’s recent high inflation.
Oil & gas demand rose after the COVID-19 pandemic and when Russia invaded Ukraine, cutting global supplies.
In addition, the Russia-Ukraine war reduced the amount of grain for sale, driving up food prices. Consequently, inflation in the UK soared to 11.1% in October 2022, the highest rate in 40 years.
Since then, the rate has fallen significantly. However, lower inflation doesn’t necessarily mean prices are plunging; it is just that they rise less quickly.
Why does putting up interest rates help to lower inflation?
The Bank of England aims to keep inflation at 2%.
While inflation remained several times that level, the Bank increased interest rates to 5.25%.
The idea is that if borrowing is made more expensive, people have less money to spend. As saving rates increase, they may also choose to save more.
In turn, this lowers demand for goods and slows price rises.
However, it’s a balancing act – boosting borrowing costs risks harming the economy.
For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.
Businesses also borrow less, making them less likely to create jobs. Some may cut staff and decrease investment.
What is happening to inflation and interest rates in Europe and the United States?
Many other countries have also been experiencing a cost-of-living squeeze and higher interest rates.
However, even at 3.4%, UK inflation remains higher than in the EU and US.
The annual inflation rate for countries using the euro was 2.6% in February, down from 2.8% in January.
In the US, inflation hit 3.2% in February, up slightly from 3.1% in January.
In September, the European Central Bank raised its key interest rate to a record high of 4%. It remains there.
At its March meeting, the US central bank again kept its key interest rate between 5.25% and 5.5%.
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