Price rises speed up as economy unlocks

As the economy reopens after the pandemic, price rises continue. The UK inflation rate hit a high of 2.5% in the year to June, the highest for nearly three years.

The rise inflation from 2.1% in May was driven by higher food and fuel costs. That means for a second month now, the rate is higher than the Bank of England’s target of 2%.

Increasing inflation rates will likely spark a debate about whether interest rates should go up.

What is inflation?

Inflation is the rate at which prices are rising. For example, if the cost of a £1 pack of apples rises by 5p, then apple inflation is 5%.

Low levels of inflation from month to month may go unnoticed, but will have a long term effect. These price increases can significantly impact how much you can buy with your money in the future.

Inflation applies to both products and services. The rise was widespread, with an increase on costs for food and clothes shopping, eating out, and vehicles. Between May and June this year, prices of second hand cars increased, but at this time in recent years, prices have fallen.

The rise in inflation is above the forecast increase of around 2.2%. This is because of the increased demand for some products. The pandemic caused people to panic buy and strip supermarket shelves. While a shortage in production delayed supply of new cars, resulting in some buyers turning to the used car market instead.

However, some of the effects causing the increase are temporary. For example, rising fuel prices are increasing inflation, but a lot of this is down to recovery from lows earlier in the pandemic. The rise is also affected by a lack of seasonal summer sales that we would usually see at this time of year.

What is happening with interest rates?

The cost of living also rose in some areas from 3.3% in May to 3.9% in June.

Meanwhile, pressure is now on the Bank of England to consider increasing interest rates. However, their committee views the current surge in inflation rates as “transitory” and think it will soon fall back after peaking at 3%. As the economy fully reopens after all Covid restrictions ease, things are expected to go back to a more normal level.

But a chief economist warns that the risk of high inflation is “rising fast” and has potential to reach near 4% this year. The upward trend is expected to continue over the summer because of global supply shortages.

There is no argument that Inflation is up again, above target, with prices rising faster than expected. But the reason why is clear, much of it is a cause of the coronavirus pandemic. Demand is bouncing back, but bottlenecks in the supply chain are driving prices up.

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