What is inflation and what is the current UK rate?

By Talya Honebeek

Inflation has surged to its highest level in almost a decade, according to new data from the Office for National Statistics (ONS).

The August increase is the largest on record, and brings inflation to its highest rate since 2012, above the Bank of England’s 2% target.

The ONS said that the high rise in inflation is due to the discounts seen across the hospitality sector last August under Chancellor Rishi Sunak’s Eat Out to Help Out scheme, which allowed diners to get 50% off their bill across thousands of restaurants.

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They added that the recent supply chain crisis will also have contributed to the sharp rise in inflation rates, but that it will likely only be a temporary surge.

But what is inflation, how is it measured and what does the UK’s current inflation rate mean for you? Here’s what you need to know.

What is inflation and how is it measured?

Inflation is a measure of how the price of goods has changed over a certain period of time.

The ONS publishes updated inflation rates each month, which shows how much prices for goods and services such as food, petrol and hair cuts have changed on average over the last year.

This means the latest statistics were generated by comparing the prices for goods and services in August 2020 with that of August 2021.

To do this, the ONS collects about 180,000 prices of around 700 goods and services from across the country. The prices are updated each month using the same retailers and service providers to ensure fair results.

Not all goods and services are ranked equally, and essential products that people buy more often, like petrol or diesel, are given more weight when calculating inflation.

What is the current inflation rate in the UK?

According to the new statistics, the main Consumer Prices Index (CPI) measure of inflation soared to 3.2% in the 12 months to August 2021, which is up from 2.5% in June and 2% in July.

There are a number of different measures of inflation that all deal with different types of goods or services.

The main measure used in the UK is the Consumer Prices Index, however, there is also a separate Consumer Prices Index including housing costs (CPIH) as well as a measure for Retail Prices Index (RPI), which also takes into account rises in student loan interest rates, among other things.

A small, steady level of inflation is normal, as reflected in the Bank of England’s target inflation rate of 2%.

However, a sharp increase or decrease in inflation can put pressure on both businesses trying to set prices and individuals trying to manage their spending as prices rise and the value of wages decreases.

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