Rejoice. The Bank of England has tamed the inflation dragon, reducing it to its mythical 2 percent target for the first time since July 2021.
But when we crunched the Office for National Statistics figures, our analysis shows that inflation has since reached 20 per cent as households have struggled with the higher costs of everything the crisis has been.
Some may have managed to absorb the price hike without breaking a sweat, but plenty of others have had a miserable time trying to keep up with the inflationary beast.
Much of the inflationary drama was caused by energy price spikes as a result of the end of blockades and global conflict – a knock-on effect hit almost all businesses and the additional costs were subsequently passed on to customers.
In the South East it is now hard to find a flat white for less than £3.50 or a pint for £6.50 and across the country we have been dealing with higher energy bills, spiraling supermarket costs, skyrocketing inflation-based increases from telecoms and even before you factor in council tax increases, skyrocketing mortgage and rental costs to name a few.
They won’t suddenly start dropping now. Price points have been set. In the notional basket of 700 goods and services, which represents what households buy, prices rose another 2 percent in the year to May.
That’s still a long way off, with inflation peaking at a whopping 11.1 percent in October 2022, the highest rate in 40 years.
But mild inflation doesn’t mean prices are magically falling now. Some items in this basket have gone down in price, but overall the basket is still growing – just not as fast.
Yes, wage growth has been steady – beating inflation since the middle of last year – but much of it has been siphoned off by rising bills across the board.
Our personal finances have been a hot topic in next month’s election, with all the major political parties now outlining in their platform statements what they plan to do and how they think they can fund it (and of course, there are a lot of them, to put it mildly).
According to the ONS, the easing of annual inflation is due to “downward contributions” from eight divisions, partially offset by “upward contributions” from two.
Food and non-alcoholic beverages saw the largest decline, with prices rising by 1.7 percent through May 2024. This is the lowest since October 2021 and represents 14 months of easing, from a recent peak of 19.2 percent in March 2023.
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The ONS says the main downward pull from this category comes from combinations of bread and cereals, vegetables and sugar, jams, syrups, chocolate and confectionery. In both cases, prices fell between April and May this year compared to monthly growth a year ago.
But as the Energy and Climate Intelligence Unit points out, the basket of some staple foods has increased by 40 percent over the past three years.
It says the basket of goods – which includes potatoes, rice, broccoli and coffee – has risen from £23.73 to £33.96 in that time.
For example, the price of a bottle of olive oil has increased by 136 per cent from £3.64 to £8.60 since June 2021.
A bag of sugar is up 72 per cent at £1.19 from 69p and potatoes are up 49 per cent, a 19 per cent rise since December 2023.
A 2.5kg bag of cuttings is said to now cost £2.20, up from £1.85 in just a few months after a record wet autumn and winter hit the UK potato harvest.
He notes: “Although year-on-year inflation has eased, prices have remained close to record levels and many food items have not fallen since they started rising rapidly in the second half of 2021.”
Other areas that the ONS said saw easing include recreation and culture and furniture and homewares.
Transport provided the upward shift, mainly due to higher costs of refueling a car compared to a year ago – although it noted that used car prices had fallen significantly.
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Punishing increases in the prices of essentials such as food and energy have come as rent and mortgage costs have skyrocketed for most people.
The big question is, will the bank start cutting the base rate? If market estimates are accurate, the odds of a surprise cut today are slim to none, while for August the odds have lengthened despite being hit by 2%.
Pressure is likely to grow to cut rates, potentially helping to reduce the cost of personal loans – but the stars will need to align to convince more MPC members to cut.
Importantly, while the CPI inflation rate is at 2 percent, the core rate – which excludes food and energy – was 3.5 percent and services inflation is still at 5.7 percent.
There is also a chance that inflation will rise again between now and the end of the year, with Ofgem’s cap on energy bills the most likely cause of this – experts at Cornwall Insight believe it could be £1,762 in the last three months of the year compared to 1 £568 for July to September.
That would be a typical 12.3 percent increase to bake back into our monthly expenses.
The inflationary dragon is sleepy – but not completely out.
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