Prices have risen sharply in the UK in recent months, and are now higher than a year ago. The speed of that increase is called the rate of inflation.
The rate of inflation rose to 5% in the winter of 2021 and it will reach about 6% by spring 2022. But we expect it to start to come down after that.
That’s because most of the causes of the current high rate of inflation won’t last. Many of them are related to the effects of the Covid pandemic on the economy.
We expect the rate of inflation to fall quite quickly from the second half of 2022, as the effect of these temporary factors ends. And we expect it to keep falling in 2023.
But even though the rate of inflation will slow down, the prices of some things may stay at a high level compared with the past.
Why has the rate of inflation in the UK gone up?
There is more than one reason why the rate of inflation started to rise in 2021. A lot of it was to do with the economy recovering from the Covid crisis.
When the UK opened up after Covid restrictions eased, people naturally wanted to start buying things again.
But the people selling some of these things have had problems getting enough of them to sell to customers. This block in the supply caused prices to rise during 2021.
There were also unexpected events, like flooding, which slowed down the production of all sorts of electronic goods.
Added to those factors was a very sharp rise in energy (oil and gas) prices. All of these things have pushed up prices, and will continue to be reflected in the annual rate of inflation over the coming year.
How high will UK inflation go?
We expect the inflation rate to reach around 6% by spring 2022.
That is higher than normal but there are lots of the things that haven’t been normal about 2020 and 2021.
We know some people are worried there will be a return to the high rates of inflation that the UK experienced in the 1970s. But we are confident that inflation will not get anywhere near those levels this time.
We expect inflation to stay high over the coming year, then start to fall back towards 2%.
What does inflation mean for me?
Inflation (a rise in prices) means an increase in the cost of living. You will be able to buy less of some things with the same amount of money than you did before.
But how much costs change will vary. The cost of some things will go up more than others. Some prices may even come down.
What will make a difference is how much your overall cost of living changes relative to your income. If prices rise but your income stays the same as it was a year ago, you will probably notice that it doesn’t go as far as it did.
We expect the rate of inflation to start to fall back in the second half of 2022. So the faster increase in the cost of living we are seeing now will start to slow down.
What is the Bank of England doing about inflation?
The Bank of England can’t do anything about the supply problems or the energy prices that are currently pushing up inflation.
But we do have tools to make sure inflation comes back down if we find that price rises we are seeing now become persistent.
The main tool we use to bring inflation down is to increase interest rates.
Higher interest rates makes borrowing more expensive and it encourages saving. That reduces how much people spend overall. And this will help to keep inflation down.
But higher interest rates don’t work straight away. They take time to take full effect. So when we use them, we always look at what will happen in the economy in one or two years time, not just what’s happening now.
The actions we take to keep inflation low and stable are called monetary policy.
Why have we put interest rates up?
We have raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25%. We have done this to make sure the rate of inflation comes back down to 2% - this is the target the Government has set us.
We may need to raise interest rates further in the next few years. But any increase is likely to be modest. We are not going back to the very high interest rates that people experienced in the 1980s.