All good things must come to an end eventually, and the UK’s long streak of economic relief stuttered to a halt today as inflation rose to 2.2%.
This has not come as a surprise to economists. Observers were expecting inflation to rise this year, with the Bank of England predicting a rise of up to 2.75% this year.
The 2.2% rate is 0.2% above the ideal inflation figure for the Bank of England, which always targets 2%. In the long-run, the Bank does expect the rate to fall once again to 2% in the new year. It is important to note that whether or not the rate stands at 2% or 2.2%, it is still far better than the 11.1% it stood at in 2022.
Regardless, the news will not be welcomed by consumers or the Labour Party, which is still working to set itself up as a government for growth – as it billed itself during the June and July election campaign – five weeks into its administration.
Darren Jones, Chief Secretary to the Treasury, said: “The new Government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living.
“That is why we are taking the tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”
Although not ideal for the general public or government, a 0.2% increase in inflation is still less than many economic observers expected. This means that the prices of goods and services will not rise as steeply for consumers as was feared.
Either way, this is still not ideal for consumers, nor for the industries that they spend their money on. Focusing on payments, service providers and processors could perhaps expect a dip in volume as people look to reduce spending against a slight increase in prices.
A desire for less spending may also see some investors, namely individual ones as opposed to large hedge funds and investment banks, reduce their personal spending. New fintech startups may want to keep this in mind, due to early stage investment being critical to setting up a stable shop.
UK consumers continue to face high living costs, even if inflation has fallen from its height in 2022 and the economic recovery from COVID-19 continues. Interest rates too remain an area of concern for the general public, although there are some projections that the Bank of England may cut the rate further in September, having reduced it to 5% earlier this month.
Alastair Douglas, CEO of TotallyMoney, a personal finance app, comments: “The rise in UK inflation to 2.2% is a reminder that economic stability remains hard to come by. While it’s not as high as economists feared, it’s still above the Bank of England’s 2% target, signalling that the cost-of-living crisis is far from over for many Britons. Millions of people who were struggling a year ago, still are today.
“This uptick, though modest, could complicate the Bank of England’s decision-making process. With their next meeting approaching, there will likely be heated debates about whether to hold steady or lower rates. However, even if a rate cut is considered, it might just be 0.25 percentage points — meaning borrowing will still be expensive.
“Prices remain high across the board, and millions of people continue to grapple with financial pressures. The reliance on credit and alternative financing options like buy now, pay later schemes highlights the depth of the problem.”
Some studies show that consumers are being very careful in managing household budgets.
A study by credit building business Loqbox, for example, found that 56% of British parents have cut non-essential spending to afford summer holidays. A further 51% are closely tracking expenses to stay within budgets, 20% are using funds saved throughout the year, and perhaps most worryingly, 17% are turning to credit cards or loans.
Tom Eyre, Co-CEO and Co-Founder of Loqbox, commented: “Our survey reinforces what we are seeing across the UK, not just with parents but with all demographics, ages and backgrounds.
“In response to the ongoing cost-of-living crisis, there is a sizable shift of people building up financial buffers to fund their spending plans and achieve lifestyle goals. Having savings safety nets in place means people are less reliant on costly forms of credit and other types of borrowing.
“With access to the right financial education and personal budgeting tools, people can be empowered to make more informed and responsible purchasing decisions and boost their financial wellbeing – not just for themselves but for their families too.”
Whilst an inflation rate of 2.2% is still far less than the 11.1% rate seen in 2022, and shows the progress Britain’s economy is making – alongside a return to growth earlier this year – prices remain a consistent concern for consumers and businesses alike.
“The government and financial sector must work collaboratively to address these challenges,” TotallyMoney’s Douglas concludes.
“This includes developing more inclusive financial products for the underserved, providing clearer guidance for those struggling with mortgage payments, and implementing policies that genuinely tackle the root causes of economic inequality.
“While this inflation figure might seem like a small victory, it’s important to keep perspective on the broader economic challenges that continue to affect millions of UK households.”
