9^th September 2025

UP OR DOWN,INFLATION, WHAT IS IT ?

For this issue I will be focusing on inflation, ok, this is something that a lot of people find boring. But as always, my hope is that it’s set out in such a way that it is more easily understood. There will be some jargon. For which I will give an explanation as and when they occur.

What is Inflation?

Inflation, what is it and how does it affect us first as individuals and the country as a whole. In fact inflation affects everyone’s lives, as inflation is another term for rising prices. Something that is all too familiar. The Bank of England is our Central Bank and one of its responsibilities is to control the rate of inflation. To simplify what the Bank of England does in relation to inflation, Is to say that it uses various methods to control how fast prices rise in the UK. We as a country are familiar with the fact the higher prices affect the amount of goods and services that we can buy. Resulting in us as consumers, ( A Consumer is a person who buys goods and services for their own personal use), being able to buy less for our money. So why is this bad for the economy? It harms the economy by slowing growth: when we buy less, production decreases, leading suppliers to cut jobs, use less equipment, and reduce purchases from their own suppliers. This cycle is repeated as long as prices continue to increase. The rate by which prices rise is called the rate of inflation. As of July this year, the rate of inflation stood at 3.8%.( Bank of England) Meaning that if we bought the same products a year ago it would be 3.8% less expensive.

What is considered a good rate of inflation?

 The benchmark for inflation that is set by the government is 2%. Why this number? It’s considered low  enough to not cause the pressures on growth as indicated above i.e. to provide incentives for companies to want to expand and this will lead to more people being employed as well as not making us, the consumer reduce our spending.

How is the rate of inflation calculated?

The Bank of England  uses the Consumer Price Index in order to come up with the figures. The Consumer Price Index (CPI) uses 700 goods, which include basics like bread, but also things like cars. Using the prices of 120,000 prices of those 700 goods and services taken during the twelve-month period (Bank of England). An example of how this is calculated is as follows, say for example that last year’s basket of goods was £100.00 but 12 months later it had risen to £102.00. Then, the result would equate with a 2% inflation rate,(Bank of England Explainer).

So how does the Bank of England make this happen?

The Bank of England has a particular committee who is responsible for regulating the rate of inflation, known as the Monetary Policy Committee,(MPC).It has two main ways that it uses to affect inflation rate. The Bank Rate is currently 4%. It should not be confused with the rate of inflation. The Bank Rate, set by the Bank of England, serves as a benchmark for interest rates applied to borrowers and lenders. Its purpose is to influence the money supply in the UK by affecting borrowing costs for businesses and individuals. When the Bank Rate increases, borrowing becomes more expensive, which generally leads to higher saving and reduced spending. The end result is that there is a reduction in the supply of money in circulation, Prices tend to fall as does inflation. Then, if the Bank Rate falls. Then people will usually spend more and save less. Understanding the factors that contribute to inflation is important.  High costs of production, i.e. raw materials or wages, can also affect the rate of inflation.

The Bank of England also has another tool to affectively increase money supply, known as Quantitative Easing (QE). Here, the Bank of England buys government bonds( governments borrowing instrument, simply put, it is an IOU from the government to the purchaser. There is an interest rate, usually low, but still attractive to investors as the government is thought to be a reliable investment. Upon maturity, the original loan is paid plus the interest incurred. The Bank also buys corporate bonds. These purchases are made using Central Bank reserves, a digital transfer and not money from taxation. By buying these bonds it increases its assets. So is classed as an asset purchase, against which is it able to increase the supply of money in circulation. When the bonds mature, prices for the bonds go down and so does the amount of money circulating in the economy.

Note: Buying bonds pushes long-term interest rates down on savings and on loans. Which increases overall spending in the economy.

The Monetary Policy Committee (MPC)

It is a group of five people including the governor of the Bank of England. It is they who set the benchmark inflation rate at 2%.  And they decide what the Bank Rate will be for the following three months. By a majority vote.