Written by Damilola Olasupo, Business Economics Reporter.
So, what is inflation?
In economics, inflation means an increase in prices. Look at what you would normally spend your money on and ask: have you paid more for those things over the past 12 months than you did the year before? Let’s say that a packet of your favourite snack used to cost £1, but now, a year later, it costs £1.05. This means that your packet is now 5 per cent more expensive because of inflation.
In April 2024, prices in the UK went up by 2.3%, which is the lowest increase since September 2021. However, this figure is still above the Bank of England’s target of 2%. Inflation, which can be understood as the rise in prices over time, can affect what you pay for everyday items. The Office for National Statistics (ONS) keeps track of price changes in our market baskets. However the ONS analysis is based on something called a ‘basket of goods’. Inflation has slowed from its high but prices are still rising due to expensive energy and food, lack of workers and the high demand for oil and gas driving up prices caused by the impact of Covid on our lives and the war in Ukraine. The solution for inflation is for the Bank of England to increase the rates of interest. This makes loans more expensive, but also means that savings earn more interest. More expensive borrowing and higher interest on money in the bank means that it should be less attractive to spend your money, therefore reducing demand and making prices rise more slowly.
As a young person, you may not see why paying attention to economic news matters. Yet inflation affects virtually everyone’s daily life in many ways you might not think about until it hits home. One of the most direct effects is that your regular allowance or the money you earn from a part-time job will likely not buy you what it used to. If you are a big snacker, a big makeup or clothes person, or a big personal-items consumer in general, then the next round of items on sale might cost more than you can bear. If your family is feeling the effects of inflation in rising mortgage payments and energy bills, you might see your parents’ resources for extras evaporate at a faster pace, including outings, fashion or maybe even the basics. For the youth, rising interest rates can have mixed effects. On the one hand, higher interest rates make saving seem more attractive; a young person with a savings account might earn more towards their savings. For a large purchase, savings can grow faster. On the other hand, if a family wants to borrow money for a car or home repairs, then those loans will be more expensive.
Looking forward then, it’s important to understand these financial dynamics, as you get older and start dealing with your own money. If you are planning to go to University as an older teenager, for example, the fact that rates of inflation – and interest – are likely to rise in the coming years could well mean that you are facing much higher tuition and living fees. You’ll need some basic budgeting skills to manage these expenses, in order to avoid getting into too much debt, as well as good saving and investing practices, in order to build up a degree of financial security and/or meet your goals.
Wages are increasing at a rate of 6 per cent in the early half of next year, which is about 1.9 per cent in real terms after inflation. That’s welcome, because it might be a sign that the squeeze on households is finally easing, with consumer price inflation expected soon to return towards the Bank of England’s target, paving the way for lower interest rates. Inflation figures for June are due on 19 June and the interest rate decision a day later.
Just keeping track of pertinent economic news, and being generally prudent with your money, will help you to work against the impact inflation might have on your standard of living.
