Inflation has dropped, but will it affect your cost of living?

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Today (22 May 2024), you'll see headlines about how inflation has fallen. But what does that mean for you?

The Consumer Price Index (CPI) rose by 2.3% in the 12 months to April 2024, according to the Office of National Statistics (Si apre in una nuova finestra)(ONS). It has come down from 3.2% from the previous month.

The organisation says that “falling gas and electricity prices” were the main driving force for inflation decreasing. However, the largest increase came from motor fuels.

What is inflation?

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According to the Bank of England (Si apre in una nuova finestra), CPI is measured by comparing the cost of things today with how much they were a year ago. The average increase is known as the inflation rate.

Goods and services are looked at over 12 months. ONS collects around 180,000 prices of about 700 items, known as the “shopping basket.” Items include food, rent, furniture and services including hourly rates for plumbers and train services.

So if the inflation rate is 2.3%, prices are 2.3% higher than they were 12 months ago.

Does inflation affect mortgage rates?

Mortgage rates are indirectly affected by inflation because of the Bank of England.

The Bank of England is in charge of trying to lower inflation and deciding on interest rates. These rates are the cost of borrowing money and the result of saving.

When inflation rose dramatically in Autumn 2022 (11%), the Bank of England increased interest rates to discourage people from borrowing money. A panel of nine people decide on these interest rates every two(ish) months, looking at the state of the economy to guide their decisions.

According to the Bank of England, if interest rates go up then people will borrow less and spend less. It believes that over 18 months this will help reduce inflation.

On the 9th May 2024, the panel announced that interest rates were staying at 5.25%. They will announce any changes on 20th June 2024.

So, for the moment, mortgage rates will not be coming down due to this month’s inflation figure.

Does a fall in inflation mean my bills will go down?

It’s important to know that inflation and the cost of living are not the same thing. While inflation is how much prices go up over 12 months, the cost of living is how much people spend on goods and services.

The price of food and services is determined by individual companies and it’s not guaranteed that with the inflation rate decreasing the price paid for those goods will go down.

Another example - even though inflation decreased overall, motor fuel went up. So even if you pay slightly less for your food, you could be paying more for your petrol.

Activist and economic, Gary Stevenson, known for his YouTube channel Gary’s Ecomonics, predicted the fall of inflation (Si apre in una nuova finestra) ahead of the announcement. He warned that a decline in inflation rates wouldn’t mean people’s lives would get better.

He explained that even though inflation was getting closer to 2% (the government’s target) it would not mean that prices would “normalise” but rather prices wouldn’t rise as quickly.

“Your life will not get better. Your groceries will not get cheaper,” he told his audience.