The Bank of England (BoE) defines inflation simply as a term used by economists to “describe the increase in prices over time”.
Rising costs in goods and services on the UK high street indicate that the value of the British pound is in decline, which in turn means a reduction in consumers’ purchasing power and therefore their quality of life, as they are discouraged from spending more than they can afford.
This in turn eats into national economic growth.
“A healthy economy needs to have a low and stable rate of inflation,” the central bank explains. “The government sets a target for how much prices overall should go up each year in the UK. That target is 2 per cent. It’s the Bank of England’s job to keep inflation at that target.
“A little bit of inflation is helpful. But high and unstable rates of inflation can be harmful. If prices are unpredictable, it is difficult for people to plan how much they can spend, save or invest.
“In extreme cases, high and volatile inflation can cause an economy to collapse. Zimbabwe is a good example. It experienced this in 2007-2009 when the price level increased by around 80 billion per cent in a single month. As a result, people simply refused to use Zimbabwean banknotes and the economy ground to a halt.”
The BoE sets monetary policy to exert control and prevent such situations arising, primarily through managing interest rates.
“Higher interest rates make it more expensive for people to borrow money and encourage them to save. That means that overall, they will tend to spend less,” the bank continues.
“If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.”
In Britain, the phenomenon is measured monthly by the Office for National Statistics (ONS), which checks the price of 700 typical goods and services that UK consumers regularly spend money on, from bread and milk to cars and foreign holidays.
The total price of a “basket” of such items is calculated to give us the Consumer Price Index (CPI), which is compared to its equivalent a year earlier to reveal how much the rate of inflation has risen over the past 12 months.
In its most recent announcement on 17 August, the ONS revealed that the UK’s rate of inflation had soared to 10.1 per cent in the year to July, a 40-year high.
The development placed renewed pressure on new prime minister Liz Truss and her Cabinet to announce further help for British households facing a spiralling cost of living crisis, with soaring domestic energy and fuel prices a particular cause for concern even before Russia commenced its reviled war in Ukraine in late February, exacerbating international supply problems.
For the same period, the inflation rate in the Eurozone was 8.9 per cent, still high but not quite so severe as Britain’s, despite the EU facing many of the same challenges as the UK.
“I understand that times are tough, and people are worried about increases in prices that countries around the world are facing,” then-chancellor Nadhim Zahawi said when the ONS figure was revealed.
“Although there are no easy solutions, we are helping where we can.”
Energy regulator Ofgem has since confirmed that the UK’s energy price cap will rise to £3,549 from first 1 October, an 80 per cent rise in the maximum a household on an average tariff can be charged by their utility company, which is expected to rise further in the next two coming quarters.
Despite having earlier expressed her distaste for “handouts”, Ms Truss’s new administration is now being tipped to unveil £40bn of state help this winter in a bid to prevent millions of Britons sliding into fuel poverty and facing a bleak midwinter.