Britain is struggling with a price-of-living crisis that has sent inflation over the Bank of England's 2% target. Policymakers aim to reduce the pressure on prices by tightening monetary policy, while boosting wages.
Inflation is measured by the monthly Consumer Prices Index (CPI). The CPI measures changes in prices of 700 items commonly purchased by UK consumers. It includes food, transport and household goods.
Food
The cost of food has soared in the UK, making the core of the average food basket increasingly expensive. This is due to a combination of increasing energy costs and the impact of pandemic-related supply shortages, which has made global commodities more expensive, according to Morgan Stanley.
Food inflation in the UK was 13.3% in December, up from 12.4% in November and the highest since records began in 2005. High prices for animal feed, fertiliser and energy contributed to the increase, the British Retail Consortium (BRC) said.
Energy
UK household energy bills will rise more than double in the coming year. The price cap has been slashed from twice a year to quarterly, causing energy suppliers to pass on wholesale prices in line with inflation.
Gas and electricity prices are higher in the UK than in many other European countries for a variety of reasons. First, the country relies on gas to generate 40% of its electricity, compared to less than one fifth for the bloc as a whole.
Second, the country's houses are poorly insulated, making them more susceptible to the impact of high energy costs.
Third, the country's dependence on gas means that a drop in supply could hit households hard.
New Chancellor Jeremy Hunt has watered down the government's plans for energy bills in his budget this week, but still promises to offer a two-year guarantee for a typical family and support for vulnerable businesses. But this will take time to feed through into inflation.
Transport
The transport sector, a crucial part of our economy, has faced a lot of challenges over the past two years. Rising energy costs, a shortage of drivers and heightened competition among carriers all put pressure on transportation networks.
In the UK and the euro area, transport prices declined during the first half of 2021. This followed a similar trend in the United States, where growth was negative in both May 2020 and June 2021.
However, these trends reversed during the second half of 2021 and into 2022 due to a variety of factors including increased demand in response to the coronavirus pandemic and higher fuel surcharges.
The resulting inflation rate has slowed the recovery of the transportation sector, which is especially important as a number of sectors are already seeing lower ridership levels and service schedules. With less cash in people’s wallets, the onset of ridesharing, scaled-back infrastructure projects and other factors, the pressure is on to reduce inflation as quickly as possible.
Other
Inflation is an important indicator of the state of the economy. It tells us how much more expensive goods are becoming, and whether there is enough demand for them.
In the UK, inflation is high. This is largely because of rising food and energy prices, which has pushed many households to the edge of financial hardship.
As a result of the rise in price, some workers are demanding higher wages. This can be a good thing for employees, but it can also be a negative for business owners as it means that they will have to increase their prices.
Inflation is a global issue, and the UK is not the only country facing it. However, it has hit this nation particularly hard.