Written by Millan Chauhan.
Last week saw the UK’s Chancellor of the Exchequer, Rishi Sunak, unveil his spring statement update that, in an attempt to support individuals with the rising costs of living, saw a marginal cut in fuel duty and a rise in the minimum threshold of National insurance. On Wednesday last week, UK inflation hit a 30-year high, reaching 6.2% in the 12 months to February. Inflation was at 5.5% in the 12 months to January, but the Russia-Ukraine conflict saw energy prices move even higher due to supply constraints, which has only added to the spiralling increase in living costs. Inflation increased by 0.8% in the month of February, with transport costs being the major contributor. Transport costs have seen an increase of 11.5% in the 12 months to February, the biggest increase of all categories measured by the Office for National Statistics.
Breaking down inflation further, energy prices were a top contributor with the inflation rate of electricity at 19.2% and gas at 28.3% for the year in the 12 months to February. The average household energy bill in February 2022 reached £1,971, compared to the previous year of £1,138, a staggering 73% increase.
Raising interest rates is one of the key monetary policy methods of tackling inflation, with the intention of reducing consumption and promoting savings. Global Central Banks have started increasing rates, with the Federal Reserve raising rates by 0.25% for the first time in 3 years. The Federal Reserve Chair Jerome Powell announced that rate hikes of greater than 0.25% may occur if necessary. The Federal Reserve expect to raise rates at each of their remaining six meetings this year. The pace at which the Federal Reserve acts to raise rates is going to be crucial as they intend to combat inflation fears without crippling the global economy. The current environment remains challenging as central banks are having to control inflation without causing a recession.