Yesterday the Office of National Statistics (ONS) announced that despite the Bank of England base rate rises over the last few months, inflation had failed to decrease from the last time that data was collected. UK inflation currently remains at 8.7%, much higher than the 2% target figure that the Bank hopes for. Today the Bank of England has announced that they will be increasing the base rate for the 13th consecutive time, rising from 4.5% to 5%.
UK Inflation and Base Rate Rises
As a way of tackling inflation, the Bank of England raises the UK’s base rate. When the base rate goes up, interest rates may go up. It then costs more to borrow money, but it also means you can earn more on your savings – so people may be encouraged to borrow less and save more. This reduces demand for certain goods and services, which could slow inflation down. That is the intention of the Bank of England’s monetary policy committee.
Since 2022, the UK’s rate of inflation has been higher than the 2% target figure that the UK’s central bank (The Bank of England) has been hoping for. In June 2022 UK inflation was at 9.4%, by July 2022 it has risen to 10.1% before dropping slightly to 9.9% in August and back up to 10.1% in September 2022.
Inflation then hit a high of 11.1% in October 2022 after the announcement of the mini budget by Kwasi Kwarteng and Liz Truss’s government. Since then, inflation has remained at around 10% until it was announced that it had dropped to 8.7% in April 2023. A positive step forward, undoubtedly. However, still far away from the 2% target, and after 12 base rate rises, many people would have expected it to have reduced more. Yesterday (21st of June 2023) the Office of National Statistics announced that again the UK inflation level sat at 8.7% in May 2023. Not reducing at all, despite the Bank of England’s efforts. So, here we find ourselves again with another base rate rise again, this time to 5% from 4.5%.
What the Governor of the Bank of England Says About Tackling Inflation
In a speech at the BCC’s ‘Building British Business’ Global Annual Conference in May 2023, the Governor of the Bank of England Andrew Bailey discussed the aim of getting inflation back to 2% and the reasons why the UK economy is struggling right now. Some of the highlights of his speech are below:
“Inflation, as you know, is much too high, and we need to bring it back sustainably to our 2% target. That is our job, and that’s what we’re going to do. But let me begin by describing the extraordinary situation we are in. It has now been over three years since Covid struck and changed our lives. The virus first disrupted economic activity on a vast scale, calling for public policy interventions few of us had ever thought we would see in our lifetimes. Then in subsequent waves, even as we learnt to adapt and benefit from effective vaccines, developed at record speed, it continued to add immense uncertainty to outcomes for public health and, through that, for the outlook for the economy.”
“It is striking that, after the initial recovery in 2020, the level of economic activity, measured by monthly GDP, has failed to grow beyond its pre-pandemic level on a sustained basis, hovering around that level since early 2022 and falling slightly below in the latest release for March. That sets the United Kingdom apart from other advanced economies. Both the euro area and especially the United States have more than recovered the economic ground lost in the pandemic. The slow recovery from Covid came alongside a series of big supply shocks that have continued to shape economic and inflationary dynamics in the United Kingdom.”
The First Supply Shock
“The first of these supply shocks was a sharp rise in the prices of globally traded goods as global supply chains were overwhelmed by an unexpectedly persistent shift in demand from services to goods across the advanced economies. This shock, however, is now much reduced as global supply pressures have eased.”
The Second Supply Shock
“The second supply shock has been caused by Russia’s appalling war on Ukraine and its people. By driving up wholesale gas prices in European markets, this has been the largest single contributor to CPI inflation in the United Kingdom by some distance. While making up less than one twentieth of the CPI basket, electricity and gas have directly added up to 3½ percentage points to overall UK inflation. As energy prices have fallen from their peaks over recent months, we expect that some of the effects of this shock will also now reverse.”
The Third Supply Shock
“The third supply shock has been a domestic one. As Covid hit, UK labour supply growth came to an abrupt halt. The size of the workforce declined by more than 130,000 people, or nearly ½%, from the three months to December 2019 to the three months to January this year. The primary cause of this reduction in labour supply is an increase in economic inactivity, not just reflecting the ageing of the population, but also driven by a fall in the share of working-age people taking part in the labour market. This has also contributed to inflationary pressure. In the most recent data – including this week’s labour market data from the Office for National Statistics (ONS) – there are some signs that this shock too is reversing somewhat, especially among younger people.”
The Fourth Supply Shock
“The fourth shock is a sharp rise in food prices. A year ago, I warned that disruptions to Ukraine’s supply of agricultural products to the global market could drive up food prices to worrisome levels. Since then, the annual CPI inflation for food and non-alcoholic beverages in the United Kingdom has risen from 5.9% in March 2022 to 19.1% in the latest March 2023 numbers. This is not just happening here in the United Kingdom. Other European countries have similar food price inflation rates. Increases in energy prices and poor harvests, in addition to Russia’s invasion of Ukraine, have played a role throughout the continent.
These big external shocks continue to account for a large part of the inflation overshoot above target. In turn, by worsening the terms on which we trade with the outside world, the rise in external prices has reduced our real national income. This is being felt by households across the United Kingdom, most acutely by those on lower incomes.”
Worried About Base Rate Rises and Inflation? Speak To a Financial Advisor.
If you are worried about base rate rises and the impact that this might have on your mortgage and other finances, then please feel free to give our team of mortgage advisors a call today. We can help you to re-structure your current mortgage deal so that even if rates increase, you will always be comfortable with your repayments. Call us or send us a message today for a free initial mortgage consultation.