UK Inflation Plummets to 6.8%

When the UK’s inflation rate dropped sharply from 8.7% to 7.9%, there was much speculation as to whether this trend would continue in 2023. As per reports from the BBC in August, inflation has now fallen to 6.8%. In this article, we look at the current situation, the contributing factors and what it all means for British businesses.

What is the Inflation Rate?

The inflation rate is the rate at which the prices for goods and services increase over time. Subsequently, the indicators for inflation and pricing are consumer price inflation, producer price inflation, and the House Price Index. In the UK, the Consumer Prices Index (CPI) often gauges inflation, as it considers the cost of items and services bought by the average household.

The Bank of England (BoE) increased the interest base rate several times throughout 2023 to encourage businesses to prioritise saving instead of seeking business loans or mortgages. As expenditure on goods and services diminishes, the cost of lending typically drops. The BoE’s strategy is that a gradual interest rate increase will play a role in reducing inflation in the long term.

How is the Inflation Rate Calculated?

The Office for National Statistics (ONS) calculates the inflation rate by assessing the costs of more than 700 goods and services that play a part in our day-to-day lives. Once a year, the ONS revises the ‘inflation basket’ to ensure that the analysed items still reflect the UK market. For example, in 2023, digital cameras and alcopops were dropped from the basket in favour of e-bikes and frozen berries.

In 2023, electricity and gas accounted for almost 5% of the basket - the highest share in over a decade. Fluctuations in fuel prices will now have more influence over the inflation rate.

What has Been the Reaction to the Inflation Decrease?

Chief Secretary to the Treasury John Glen said: “Today's inflation rate announcement shows great progress but inflation remains too high. I certainly think if I was deciding, with the Chancellor and Prime Minister, to borrow a lot more money or to spend a lot more money, it would have an effect on inflation.”

Deputy Labour Leader Angela Rayner said: “People are still paying more through the cost of living.” When questioned about The Labour Party's plan to address inflation, she said the emphasis would be on bolstering the NHS workforce to address waiting list woes, citing ONS figures that suggest a record number of people are unemployed due to ill health.

Rayner also claimed Labour's strategy would prioritise long-term growth, focusing on addressing the climate crisis and generating employment opportunities through sectors like onshore and offshore wind.

The Institute for Fiscal Studies has claimed Prime Minister Rishi Sunak's inflation target now looks increasingly ambitious. Heidi Karjalainen said: “The target to halve the rate of inflation by the end of the year was always a little odd as there is only so much the Treasury can do. The stubbornly high rate of price inflation for goods and services other than food and energy has put the target in jeopardy".

Does a Lower Inflation Rate Mean Cheaper Prices?

Unfortunately not. Just because the inflation rate is on a downward trajectory, it doesn’t mean that goods and services are getting cheaper for British businesses. In fact, prices are continuing to rise but at a slower pace. Price decreases would be referred to as deflation, which isn’t always a positive thing for the economy.

For example, an inflation rate of 10% would mean the cost of a £1 tin of beans has crept up to £1.10 within the last year. If the inflation rate dropped to 5%, this wouldn’t indicate falling prices but a more moderate rise, with the £1.10 tin of beans subsequently costing you £1.16. The 5% cost increase adds to the previous 10% cost increase, rather than a consistent £1 cost for a tin of beans that's susceptible to differing inflation rates.

How is Inflation Affecting Businesses?

The substantial increase in energy prices has been pivotal in driving the UK's inflation rate up in recent years. Post-pandemic, there was a heightened demand for oil and gas. Despite a notable drop in wholesale fuel prices from 2022, they remain much higher than before COVID-19 and the Russia-Ukraine conflict.

High inflation can diminish the desire for your business's goods or services, as consumers have less money to spend with you. On the other hand, inflation could work to your advantage if your business provides a budget alternative to mainstream products and services.

You mustn't overlook your operating costs. Any suppliers or partners you work with could hike their prices, hitting your business in the pocket. Also, your employees could face their own financial challenges, so it might become necessary to increase wages in line with inflation.

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Sam White