Inflation is when prices go up. And they have been going up, a lot. What’s that all about?

Simply put, if ‘inflation’ is at 10% (this is just a example number) then the prices of goods and services are 10% higher than they were 12 months ago. This figure is referred to as the Consumer Price Index (CPI), and is what most news outlets talk about.

You might also see ‘bank rates’ or ‘interest rates’ reported alongside inflation statistics. This most commonly refers to the amount of money you have to pay back when you take out a loan, and it is set by the Bank of England (BoE), so if interest rates are at 1% (another example figure) and you take out a £100 loan, you will have to pay back £101.

What does inflation affect in my life?

Anything you can buy with money is affected by inflation.

For most people, this might include utility bills, house prices, loan repayments (including what you pay back on student loans), weekly food shops, and white goods – which are things you don’t buy often but still need, such as fridges and hoovers. For Neil Parish, this means that Pornhub Premium is a bit more expensive now.

How high should inflation be?

The Bank of England (the boffins responsible for managing inflation) have been set the target of keeping inflation at 2% by the Government; 8.9% is a lot fucking higher than that.

When the target is exceeded by 1% either way (so, when inflation rates are at 3% and higher, or 1% and lower) the BoE must write to the Chancellor of the Exchequer – currently Jeremy Hunt – and explain why that is, along with their plans to return to 2%. 

How is inflation calculated?

The ONS compiles a list of these items called the Basket of Goods, which they use to calculate how much prices have increased over the year. They survey supermarkets and vendors about prices and compare them with the previous year’s prices to calculate the difference, removing certain items that are no longer relevant.

Do we actually need inflation?

Why is the BoE’s target for inflation 2% instead of 0%, anyway? In fact, how about we aim for negative inflation, that way prices will plummet like Liz Truss’ credibility, and even more people can benefit.

You could be tricked into thinking that no inflation or even negative inflation would benefit everyone – especially MPs on their last gram – but unfortunately, this is not the case.

If inflation is too high or it moves around a lot, it’s harder for businesses to set and adjust prices correctly and for people to plan their spending. Additionally, although lower inflation sounds like a good thing on the surface, if everybody reduced their spending then companies could fail, and people might lose their jobs.

Dr Jonathan Perraton, a senior lecturer in economics at the University of Sheffield, said: “If you can expect prices to fall then there is a certain rationale not to spend now but to wait for prices to fall [further], which can lead to low demand in the economy.”

In practice, deflation (when the inflation rate is below 0) isn’t so great because it sets an unhelpful precedent, meaning that people are actually spending less money because they expect goods to be cheaper later on. For example: if you had to buy £100 of luxury toilet paper because you used the last roll and now your flatmates are forcing you to pull your weight, you could probably justify using old socks for a bit if you thought it would be £80 next week.

Maybe not.

When businesses have to lower prices, they lose money, sometimes significant enough amounts that they start looking in other places to save money. Oftentimes, a business’s largest expense is its employees, so the easiest way for a business to save money is to either reduce wages or let staff go. 

Inflation and tax

Inflation has an effect on taxes and interest rates too. Ultimately, the BoE can raise interest rates when inflation gets too high in order to punish borrowers, disincentivizing people to take out loans and, to an extent, reducing economic activity. In May, this rate was increased for the 12th time in a row, up from 4.25% to 4.5%. Now, if you take out a £100 loan, you will be expected to pay back £104.50.