The Office for Budget Responsibility (OBR) has forecast an “improved outlook” for public finances, the Chancellor told MPs in the House of Commons.
The OBR originally laid out a bleak outlook in November, which predicted ballooning debt and shrinking GDP in 2023. However, falling wholesale energy prices and cooling inflation have helped boost the position of the Treasury in recent months.
Original forecasts had indicated the economy would enter recession in 2022 and shrink by 1.4 per cent in 2023.
However, the fresh projections show that the economy is set to avoid a technical recession – which means two consecutive quarters of decline – and shrink by 0.2 per cent this year as whole.
It is then due to grow by 1.8 per cent in 2024 and 2.5 per cent in the following year, before growth slows.
Here is everything you need to know about inflation in the UK, and what the latest projections mean for the economy and for your money.
What is inflation?
Inflation is a measure of how much the prices of goods and services increase over time. It is one of the most relevant economic measures for consumers as it affects their buying power and has an impact on everything from fuel prices to mortgages, as well as things like the price of train tickets and the cost of shopping.
Inflation is usually measured by comparing the cost of things today with a year ago. This average increase in prices is known as the inflation rate.
If the rate of inflation is 10 per cent, it means that prices are higher by 10 per cent on average. For example, a loaf of bread that cost you £1 a year ago will now cost you £1.10.
A little inflation can be good for the economy as it can encourage shoppers to buy sooner. When prices are going up, consumers will want to buy now rather than pay more later, which increases demand in the short term and can boost productivity.
However, a high inflation rate means people can buy less for the same amount of money. This means they may have to spend more on things like food, energy bills and filling up their car.
How is inflation measured?
In the UK, inflation is measured by the Office for National Statistics (ONS), which produces three main estimates of inflation: the Consumer Price Index (CPI), the Consumer Price Index Including Housing Costs (CPIH), and the Retail Price Index (RPI).
To calculate the CPI – the most commonly used figure – the ONS looks at the prices of thousands of goods and services across the UK, and compares them year-on-year.
The items used in the basket to compile the various measures of price inflation are reviewed each year. For example, in 2019 smart speakers were added to the list of items monitored to ensure the UK’s measure of the cost of living reflects the public’s spending habits.
When will inflation go down?
Rishi Sunak has pledged to halve inflation by the end of 2023 – but this was already forecast to happen. The Bank of England is expecting inflation to fall sharply from the middle of the year, for three main reasons.
“First, the price of energy won’t continue to rise so quickly. The Government has introduced a scheme that caps energy bills for households and businesses for six months,” the Bank says.
“Second, we don’t expect the price of imported goods to rise so fast. That’s because some of the production difficulties businesses have faced are starting to ease.
“Third, we expect there to be less demand for goods and services in the UK. That should mean the prices of many things will not rise as quickly as they have done.”
The Bank of England’s target inflation rate is 2 per cent. It has been raising interest rates in order to achieve this.
On 15 December 2022 it raised rates by 0.5 per cent, to 3.5 per cent.
Raising interest rates means people face higher borrowing costs and businesses face higher loan rates, but higher interest rates also slow price rises down, leading to lower inflation in the long run.
The OBR’s latest forecast, announced today by the Chancellor, suggests inflation is set to fall to very close to the Bank’s target by the end of 2023.
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