UK inflation was unchanged in May, defying expectations that it would increase. The Office for National Statistics (ONS) reported that the rate of price rises remained steady, providing a key data point ahead of the Bank of England's next interest rate decision.
What is Inflation?
Inflation shows the rate at which the price of goods and services rises over time. For example, if inflation is 3% and an item cost £1 last year, it means that item would cost £1.03 now. The ONS calculates inflation based on a regularly updated 'basket of goods' and services that represents what households are buying.
Bank of England Decision Looms
The latest update comes just one day before the Bank of England is set to announce its next interest rates decision. The majority of economists still expect the base rate to be held at 3.75%. The Bank of England has a target of 2% inflation and uses interest rates as a way of keeping price rises under control.
The idea is that when interest rates are higher, borrowing becomes more expensive, meaning people have less money to spend elsewhere. When people spend less money, this brings down demand and leads to lower prices, which lowers inflation. However, a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched.
Inflation has risen again, as shown in the latest figures. The ONS updates the basket of goods regularly to reflect changing consumer habits.
