The Office for National Statistics (ONS) releases its inflation data once a month. This shows the rate at which the prices of goods and services are rising by.
Inflation isn’t easy to measure, which is why the ONS has a number of measures of inflation. The Consumer Price Index (CPI), which calculates price rises of a ‘typical basket of goods’, is the most widely used. The Bank of England uses the CPI to help set monetary policy, which it dabbles with in order to meet the government’s 2% annual inflation target.
The opposite of inflation is ‘deflation’. This is where the cost of goods and services gets lower over time.
Summary of findings
Inflation has rocketed in 2021. In January 2021, the inflation rate sat at just 0.7%, meaning the price of goods and services were rising at a steady pace.
However, by summer 2021, inflation began to take off. Between July and August, the UK’s inflation rate went from 2% to 3.2%, and it has generally headed upwards ever since.
By October, the inflation rate stood at a whopping 4.2%, and it then surged to 5.1% by November. This increase in the rate of inflation – from October to November – was the biggest the UK had seen in more than 11 years.
UK inflation rate throughout 2021
In 2021, there were only three months in which the UK’s inflation rate didn’t increase month on month. These months were February, July, and September.
The biggest month-on-month fall in inflation occurred between June and July when the inflation rate dropped by 0.5%. The biggest rise in inflation happened between July and August when the UK’s inflation rate surged by 1.2%.
When inflation hit 5.1% in November 2021, it was the highest rate recorded since September 2011.
The day after November’s inflation figure was released, the Bank of England acted by increasing its base rate for the first time in three years.
UK inflation rate over the past decade
At the beginning of 2012, the UK’s inflation rate was hovering at 4%, double the government’s annual 2% target. However, over the next two years, the inflation rate cooled significantly. By the beginning of 2014, it sat at 2%, before dipping to a low of 0% by end of 2015. A year later, it rose back up to 2%.
Between 2017 and 2020, the UK’s inflation rate remained close to the government’s annual target. This meant that the cost of goods and services rose as expected during this period.
Things changed following the emergence of the Covid-19 pandemic in March 2020. The UK’s inflation rate increased rapidly, reaching a massive 5.1% by November 2021.
The UK’s recent high inflation may be attributed to the government’s economic response to the pandemic. That’s because ministers borrowed billions of pounds to fund an array of economic support schemes aimed at helping businesses impacted by the pandemic.
The Bank of England also upped its quantitative easing programme during the pandemic, which created billions of pounds of new money. Increased money supply can lead to higher prices, putting pressure on the inflation rate.
Contributions to the UK inflation rate
Rising inflation can rarely be attributed to a single factor. However, each month the ONS reveals the sectors that have experienced the biggest price rises.
For example, the ONS revealed that in November 2021, the cost of housing and household services, transport, furniture and household goods were at their highest in over two years.
It’s worth bearing in mind that the ‘household services’ category used by the ONS includes electricity and gas. The prices of these commodities soared in 2021, and further price rises are expected in 2022.
In its November 2021 data, the ONS also blamed ‘supply chain disruptions’, as another reason behind the UK’s surging level of inflation.
More generally, in 2021, the price of used cars, raw materials and fossil fuels have all risen to a large extent.
UK inflation rate compared to rates in other countries
While the UK’s inflation rate in November 2021 may seem extraordinary, it’s important to note that prices are rising by similar levels in other countries around the world.
For example, in November 2021, the inflation rate in both Germany and the Netherlands stood at 5.2%. In Spain, it was 5.5%, while the Eurozone area as a whole reported an inflation rate of 4.9%.
In other regions, India’s inflation rate was 4.9% in November 2021, while in the United States, inflation stood at 6.8%. Meanwhile, China’s inflation rate was just 2.8%.
Japan reported that it had the lowest inflation rate in November 2021, with prices increasing by just 0.1% in the land of the rising sun. Meanwhile, Argentina reported the highest inflation rate of 51.2%.
What does the UK’s inflation rate mean for your finances?
Growing inflation means the value of cash is decreasing. This may be good news for borrowers, including those with long fixed-term mortgages, as the value of their debt is essentially decreasing. For savers and investors, it may be a different story.
High inflation means that in order to protect the value of your cash, you must find a way of growing your savings at a rate that matches inflation. If you’re unable to do this, then the value of your savings declines.
Some individuals looking to protect their savings from inflation may choose to invest. That’s because stock markets typically outperform inflation in the long run, though there are no guarantees.
It’s important to recognise that investing and saving are totally different beasts. That’s because when you invest, all of your capital is at risk. As a result, it’s far from a sure-fire way of beating inflation.
But, here at The Motley Fool, we believe investing is a good way to build wealth in the long-term. So, if you choose to explore the investing option, check out our Guide to Share Dealing to get started.
We have endeavoured to use only high-quality primary sources for this research, and have cited sources with each graph. Key sources include Trading Economics and the Office for National Statistics.