Metis AM
The cost of living crisis hasn’t been far from the headlines over the past two years. Inflation has risen sharply around the world since December 2021, but rates have begun to slow in recent months, which has been good news for central banks.
The Office for National Statistics (ONS) reports that, in the 12 months to August 2023, inflation in the UK fell to 6.7%, down 0.1% on the figure for July. While this might seem like a small drop, the implications could be significant.
Read on to learn more about why price rises are slowing down and if the country could be headed for a recession.
Food and hotel prices contributed to the drop in inflation
The ONS measures inflation in several ways. One of these is by monitoring the price of a “shopping basket” of goods and services every month. As the prices of the individual items rise or fall, so too does the overall price of the basket. This helps the ONS to understand how the average cost of living is changing each month.
The ONS reported that the drop in inflation in the 12 months to August was primarily caused by falling prices for food and non-alcoholic drinks as well as hotel accommodation.
Hotel prices can be volatile because they respond quickly to surges in demand. The drop in prices this month doesn’t necessarily rule out the possibility that they will rise, or fall further, in the coming months.
Food prices have been one of the key drivers of high inflation over the course of the cost of living crisis. In August, even though food prices still rose, they did so to a much smaller extent than they did last August. Consequently, food inflation contributed to a drop in headline inflation.
Petrol prices rose in August and the government increased tax on some alcoholic drinks
The fall in the areas mentioned above offset a couple of important price rises.
One of these was the cost of fuel. The RAC reports that, in August, petrol prices increased by 6.68p a litre and diesel prices increased by 8p a litre, the fifth and sixth largest monthly increases in 23 years.
Additionally, the government made changes to tax on alcoholic drinks in August.
The legislation was first introduced by Rishi Sunak when he was chancellor in 2021 and sets the duty levied on alcoholic drinks based on their strength rather than the type of drink. This has meant that taxes on drinks like wine and spirits increased in August, while the tax on some drinks with a lower alcohol content fell.
The Bank of England chose to pause its interest rate rises
The Bank of England’s (BoE) Monetary Policy Committee (MPC) is tasked with keeping inflation at 2%, so there is still a way to go until they’re on track. To bring inflation down, the BoE has increased interest rates from 0.1% in December 2021 to 5.25% in August 2023.
The lower-than-expected rate of inflation recorded in August led to them pausing their campaign of interest rate hikes at the most recent meeting in September. The MPC report shows that the committee was split on the action that should be taken, but ultimately acknowledged the progress that has already been made on bringing inflation down from its peak of 11.1%.
It’s important to note that the BoE hasn’t ruled out future interest rate rises. Even though the drop in inflation was a move in the right direction, the fact remains that prices are still rising more quickly than the BoE would like them to.
Depending on how inflation fares over the coming months, there could be a further rise later in the year.
It’s still possible that the UK could experience a recession
Even though inflation is falling, there could still be some challenging times ahead.
A report by Reuters in August described how, though it has defied predictions of a recession so far in 2023, Britain’s economy is beginning to slow. Indicators included:
- Business activity shrank by the largest amount since January 2021
- Pay growth was the highest it has been since 2021, raising the prospect that inflation could remain high for longer
- House prices, as measured by Nationwide and Halifax, fell by the most in annual terms in a decade
- The unemployment rate rose unexpectedly, and the number of job vacancies dropped.
While the UK isn’t in recession just now, these indicators suggest that it’s not out of the question.
Even if this does happen, though, remember to focus on your own personal circumstances before making any financial decisions.
Headlines can be scary during times of economic uncertainty, but by tuning out the noise and focusing on your long-term goals, you can continue to make the most sensible decisions for you.
Get in touch
If you’re concerned about how economic uncertainty could be affecting your wealth or your ability to hit your long-term goals, we can help.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
