What we are doing about the rising cost of living

Prices have risen more quickly than usual over the last two years. There are three main reasons for this.

The first reason was the Covid pandemic. While people had to stay at home, they started to buy more goods rather than services. But the people selling these goods have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad. 

The second reason was Russia’s invasion of Ukraine, which led to large increases in the price of gas. It also pushed up the price of food. Poor harvests in other countries made the situation worse.

The third reason was a big fall in the number of people available to work. That was linked to the Covid pandemic. It’s meant that employers have had to offer higher wages to attract job applicants. Many businesses have had to increase their prices to cover those costs. That includes firms in the services sector, where wages are the largest part of business costs.

The Bank of England makes sure inflation comes down by raising interest rates. We have been raising interest rates since December 2021 to get inflation down. It takes time to work, usually 18 months to two years.

Higher interest rates mean people overall will spend less on goods and services in the shops and online. So, the economy slows down and companies can’t put up their prices so quickly.

People whose mortgage payments are higher will have less money to spend on other goods and services. More generally, higher interest rates make it more expensive to borrow money to pay for things and more attractive to save if you are able to. This tends to reduce spending on goods and services in the economy. Businesses who provide these good and services will often need to reduce their prices to tempt more people to buy them.

You can find out more in our explainer on how higher interest rates help to bring down inflation.

We know this is worrying for lots of people.

How quickly prices are rising is measured by the Consumer Price Index (CPI). CPI inflation has fallen from over 11% in October last year to just under 7% in August this year. And we expect it to keep on falling this year and next year, which is welcome news. That doesn’t mean prices will fall on average, but rather that they will increase less quickly. 

But energy bills should come down more as gas prices have fallen a lot recently. And higher interest rates will also help to bring inflation down.

Inflation was over 11% in October last year and it had come down to just under 7% in August this year. 

We expect it to come down further to around 5% by the end of this year. Then we expect it to keep on falling and reach our 2% target by the end of 2025.

We can’t say exactly what our interest rates will be in the future because it depends on how the economy is doing and what is likely to happen to inflation.

At the moment, inflation is still too high. We will need to keep interest rates high enough for long enough to ensure we get inflation back to normal.

We continuously monitor the economy and we decide the level of interest rates every six weeks or so. Our next decision on interest rates will be on Thursday 14 December 2023.

A group of nine people who make up our Monetary Policy Committee (MPC) decides what Bank Rate is. They meet every six weeks to look closely at how the UK economy is doing.

Before they make a decision, they try to understand the state of the economy now and what it’s likely to be in the coming months. The things they look at include:

• how fast prices are rising
• how the economy is growing
• how many people are unemployed

And we look at how those things are likely to change in the future. 

We can’t say exactly what our interest rates will be in the future because it depends on how the economy is doing and what is likely to happen to inflation.

At the moment, inflation is still too high. We will need to keep interest rates high enough for long enough to ensure we get inflation back to normal.

We continuously monitor the economy and we decide the level of interest rates every six weeks or so. Our next decision on interest rates will be on Thursday 14 December 2023.

We started raising interest rates in December 2021. The economy was just emerging from the pandemic. Our main concern around that time was whether the end of the Covid furlough scheme would generate a lot of unemployment, and push down on inflation. 

Once we saw that the end of furlough wasn’t generating widespread job losses, we started to put up interest rates. Raising rates much earlier than that would have meant doing so in the middle of the pandemic, when the economy had weakened dramatically, and the jobs of millions of people were uncertain, which would have been a bad idea.  

Even in December 2021, no one was expecting a war in Ukraine and what was about to happen to gas prices as a result. Our job is to react to unexpected events, and make sure that inflation comes back to the 2% target, not to pretend that we can predict them.

Since December 2021 we have raised our interest rate (Bank Rate) 14 times. The most recent rise was on Thursday 3 August 2023, when we raised it by 0.25 percentage points to 5.25%.