Consumer price inflation has risen significantly this year and was just over 10% in September, well above the Bank of England’s 2% target.
There are several reasons why inflation is so high. The biggest of these is the rise in energy prices as a result of Russia’s invasion of Ukraine. A rise in the prices of imported goods is another significant factor, caused partly by supply chain problems across the world.
Developments in the UK are also playing a role in pushing inflation up. Companies have increased the prices of goods they sell in response to higher costs. Additionally, the labour market in the UK is extremely tight, with unemployment having fallen to 3.5%, and in Wales, it is even lower at 3.3%.
Many of the businesses I speak to on my regular company visits here in Wales say they are struggling to fill job vacancies. This means they are having to offer higher wages to attract workers and they are passing on these higher costs into the prices of the products and services they provide.
One of the main reasons for the current labour shortage is that fewer people are actively seeking work following the pandemic, sadly in some cases due to long-term sickness.
The resulting inflation is hitting households and families hard, especially as the prices of some essentials such as energy and groceries have increased by more than 10%.
This is something that came across clearly during discussions with members of the public at a recent Citizen’s Panel we held in Cardiff. People have less money to spend on other things and this means that the output of the UK economy has started to fall.
We understand that raising interest rates means that people’s mortgage payments are increasing at the same time as prices are rising. But the impact on everyone would be even worse if the Bank does not take strong action now to bring inflation down.
This is why the Bank’s Monetary Policy Committee increased interest rates at its latest meeting to 3%. In total, since December 2021, we have increased our interest rate from 0.1% to 3%.
The Monetary Policy Committee may need to increase interest rates further over the coming months, but it thinks that less is likely to be needed than financial markets predict.
It is very important that we get inflation back down to the Bank’s 2% target. Low and stable inflation is part of the bedrock of the economy, allowing people to go about their daily lives and plan for the future with confidence.