Inflation holds steady at 2.2% - what it means for your household finances

Inflation remained unchanged at 2.2% in August according to data from the Office for National Statistics (ONS).

The figures, which show how much everyday goods and services increase over time, mean that prices are rising but more slowly than this time last year. Inflation in August 2023 was 6.7%.

August’s inflation figures were underpinned by increases in air fares, which rose this year but fell last year.

The rise in flight prices was offset by a fall in fuel, restaurant prices and hotels. This came despite concern that the ‘Taylor Swift effect’ might drive up inflation last month.

The latest figures mean inflation has stayed close to the Bank of England’s 2% target since June.

With inflation hovering around target, the Bank of England (BoE) could be more inclined to cut interest rates further when it meets tomorrow.

The bank’s Monetary Policy Committee (MPC), which is made up of nine people who decide what interest rates should be, voted for a 0.25% cut in July. This was the first cut in four years and reduced interest rates to 5%.

What is Inflation?

In simple terms, inflation refers to the gradual increase in the prices of goods and services over time. When inflation happens, the purchasing power of your money decreases, meaning you can buy fewer things with the same amount of cash.

Imagine you have £10 in your pocket. A few years ago, that tenner might have been enough to buy you a couple of pizzas. But if inflation has caused the price of pizza to go up, your £10 might only be enough for one pizza now. That's inflation in action.

What causes inflation?

There are a few different factors that can contribute to inflation:

• Increased demand for goods and services
• Rising production costs (like raw materials or wages)
• Changes in government policies (like printing more money)

When demand for products goes up, businesses may raise their prices to keep up with the increased demand. Similarly, if production costs go up, companies might pass those extra expenses on to shoppers.

How is inflation measured?

Economists use various methods to track inflation, but one of the most common is the Consumer Price Index (CPI). The CPI measures the average change in prices paid by shoppers for goods and services like food, housing, transportation, and medical care.

The CPI is calculated by comparing the cost of a "basket" of commonly bought items from one month to the next. If the price of the basket goes up, that indicates inflation is occurring.

What are the effects of inflation?

Inflation can have both positive and negative impacts on the economy and your money. On the plus side, moderate inflation can be a sign of a growing economy. It can encourage spending and investment, as people may be more likely to buy things now before prices go up in the future.

However, high levels of inflation can be problematic. If prices rise too quickly, it can be difficult for wages to keep up, leaving many people struggling to afford essentials. Inflation can also make it harder to save money, as the value of your savings may not grow as quickly as prices are rising.