Curious about inflation in 2023? Check this out from The Bank of England:
Full article: https://www.bankofengland.co.uk/explainers/will-inflation-in-the-uk-keep-rising
Why is inflation expected to fall quickly during 2023?
There are few reasons why we expect inflation to fall quickly this year.
First, wholesale energy prices have fallen a lot. In Europe, they have halved over the past three months. You may not have felt the impact of this on your bills yet. But this change will help to bring inflation down.
Second, we expect a sharp fall in the price of imported goods. That’s because some of the production difficulties businesses have faced are starting to ease.
Third, as people have less money to spend, we expect there to be less demand for goods and services in the UK.
All this should mean that the prices of many things will not rise as quickly as they have done.
There are signs that inflation might now have turned a corner and begun to fall a little. We need to make sure it continues to fall and stay low.
We expect inflation to begin to fall from the middle of this year and be around 4% by the end of the year. We expect it to continue falling towards our 2% target after that.
Current inflation rate10.1%
We can’t always stop inflation from going higher or lower than that. But we can make sure it comes back to that target.
The way we can do that is by changing interest rates. We’ve been raising interest rates for over a year now. It take time for the full impact of these rises to work (about 18 months to two years).
We raise interest rates in the UK by raising our interest rate, Bank Rate. It is also widely known as ‘the base rate’ or just ‘the interest rate’.
Bank Rate influences many other rates in the UK, including those you might have for a loan, mortgage or savings account.
On Thursday 2 February 2023, we raised our interest rate (Bank Rate) by 0.5 percentage points to 4%.
Raising interest rates means that many people will face higher borrowing costs. And some businesses will face higher loan rates. We know that this will make things hard for many people.
But we must act to lower inflation because low and stable inflation is vital so that money keeps its value and people can plan for the future with confidence. It’s fundamental for a healthy economy.
What we are doing about the rising cost of living
How does raising interest rates lower inflation?
People have asked us why putting up UK interest rates will help. Some say it won’t tackle the causes of the inflation and it will only make the squeeze on household finances even worse.
Higher interest rates work by making it more expensive for people to borrow money to buy things. Higher interest rates also encourage people who can save to save rather than spend. Together, these things mean there will be less spending in the economy overall.
When people spend less on goods and services overall, the prices of those things tend to rise more slowly. Slower price rises mean a lower rate of inflation.
We know higher rates are hard for many people. But we must take this action to make sure inflation comes down and stays down.
Having high inflation for a long time would cause even greater hardship, especially for the least well-off and those in unsecure employment.
The action we take to keep inflation low and stable is called monetary policy.