Inflation plays a significant role in how much people in the UK and US pay for items on an everyday basis. By understanding inflation, its connotations, and how our current inflation rate compares to previous months helps explain why grocery costs, fuel prices, rent, and any additional costs have been rising. The article addresses a few basic questions about inflation to help provide you a better idea of how inflation is affecting your pocket right now.

What is inflation?

Inflation is just the rate of increase in the general level prices for goods and services, causing purchasing power to decline for money. In simpler terms, as inflation rises, each dollar of your money buys a smaller part of a good, meaning that, including food, energy, housing, and transportation costs, everything you purchase will cost more.

What causes inflation?

Inflation is caused by a variety of factors:

• Demand-pull inflation: It’s the excess demand for goods in relation to its supply, causing prices to rise.
• Cost-push inflation: It’s when it is too expensive to produce goods, (i.e., the costs of raw materials/wages etc.), and businesses must raise prices.
• Monetary factors: Inflation can be increased by the excess supply of money in the economy.

Other events that contribute to inflationary pressures are supply chain disruptions, geopolitical tensions, and government policy changes.

What is the Current Rate of Inflation?

In the UK

Inflation rates in the UK have been highly volatile but remain high. Inflation rates can be affected by for example, energy prices, supply chain shortages and adjustments to the economy post-Brexit. As of the latest data in November 2022, the inflation rate in the UK is approximately X% (insert latest figure).

In the U.S.

Similar to the UK, the U.S. has recently experienced high inflation rates. A combination of stimulus spending, labor market changes, and international events have all contributed to inflation in the U.S., which is currently hovering around Y% (insert latest figure here).

What does the Consumer Price Index (CPI) Measure?

The Consumer Price Index (CPI) is how the government measures average change over time in prices paid by consumers for a basket of goods and services. The CPI is the key indicator of inflation which provides guidance to the government on when to take action with monetary policy.

How to Calculate CPI?

CPI is calculated using the cost of a fixed basket of goods and services in “current” time compared to a cost of that same basket in a “base” time. CPI shows the percentage increase (or decrease) in the basket of goods and services, which is in turn is inflation (or deflation).

How to Calculate Inflation Rate?

The inflation rate can be estimated by the percentage change in CPI over the two periods. Such that:

Inflation Rate (%) = [( CPI in “current” ) – ( CPI in “previous” ) / CPI in “previous” ] x 100

The inflation estimate describes the amount of increase (or decrease) in price between two periods of time.

Why is Inflation So High?

Today’s inflation rates in both the UK and U.S. has been high due to some combination of:

• Energy price surges
• Supply chain issues
• Remaining effects of the pandemic
• Leisure/culture consumption increase due to inability to spend during quarantine
• Human capital in the wrong job bracket due to lack of workers and high wages for lower skill sets
• Federal Reserve adjusting short rate to manage inflation

The situation is complicated, and inflation is likely to be high for the foreseeable future.

What is Inflation Right Now?

Current inflation rates are volatile and change rapidly, but both countries have experienced unprecedented inflation recently, impacting all aspects of people’s daily lives.

Does the President Control Inflation?

While politicians make economic policies, inflation is managed primarily by central banks, or the US Federal Reserve and the UK Bank of England, by regulating interest rates and monetary policy to stabilize inflation.

How Does Inflation Work?

Inflation reduces the value of currency over a defined period of time. Price tags rise with inflation, prices increase across the board, and expenses for essential products such as food and fuel become noticeably higher.

If prices rise over time, while savings portfolios become worthless (reduced purchasing power), wage inflation should continue to track upward.

What is the Cost of Inflation Impacting Daily Expenses See in the UK and US?

Inflation affects different categories of daily expenses:

• Food: Grocery prices have gone up due to increasing costs of transportation and production.
• Energy: Utility bills and fuel prices have skyrocketed due to shortages from global supply restrictions.
• Housing: Rent and mortgage prices are rising as inflation increases costs of new builds and home maintenance.
• Transportation: The cost of vehicles, insurance, and gas prices are going up too.

Consumers are forced to manage budgets – spent less in discretionary areas or get paid more, when they have to cope with a rise in costs.

When are the next inflation numbers out?

Inflation data is reported at a regular interval by government agencies, in the United Kingdom and the United States.

UK: A monthly update is released by the Office for National Statistics (ONS).

US: Some sort of monthly report by the Bureau of Labor Statistics (BLS).

Checking these figures help households and businesses gain a better understanding of economic trends.

Will inflation ever go down?

Inflation often rises and falls, but Central Banks work to reduce inflation back to target levels (roughly 2%). A recovery from economic growth, improved supply chain issues and an increasingly tightened monetary policy, gradually reduce an inflation rate over time, although recovery periods can be long.

Conclusion

In conclusion, inflation is important because it helps influence living costs at home and in the office, for consumers and businesses in both the UK and the US. Knowing what inflation is, the causes, the current rate, and how inflation increases living expenses, will help prepare consumers financially and improve decision making in one’s every day living and work, long term.