How the Bank of England is helping with the cost of living

We understand how difficult the cost of living squeeze is for many people here in the North East, and all around the UK.

As I travel around the region every week, visiting businesses and charities and the people who work in them, I hear all about the challenges people face and the actions they are having to take – or think about taking – to combat them.

The numbers speak for themselves.

Read more: Bank of England coming to North East for live public event

The latest data (for July) shows that prices have risen by 10.1% compared to a year ago. That is well above the target we are set by government. And we know that high inflation tends to hit those who can least afford it hardest.

The huge increase in energy prices is one of the main reasons for these high levels of inflation. Russia’s invasion of Ukraine has led to more large increases in the price of gas. Since May, the price of gas has doubled. We think those price rises will push inflation even higher over the next few months.

Higher prices for many of the goods we buy have also played a role.

During the Covid pandemic people started to buy more goods because many of the services they usually spend their money on were not available to them. But the people selling these goods had problems getting their hands on enough of them. That has led to higher prices – particularly for items imported from abroad.

There has also been upward pressure on prices from developments in the UK.

Many of the businesses I talk to tell me they are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. That means that employers are having to offer higher wages to attract job applicants. And prices for many services have gone up as a result.

The use of foodbanks has risen sharply, as we are highlighting in our Your Money Matters campaign launched by The Northern Echo and titles across Newsquest to help readers overcome the surge in the cost of living

The rate of inflation is the measure of how quickly prices have risen. High inflation means an increase in the cost of living. Quite simply, you will be able to buy less of some things with the same amount of money than you did before.

Parliament set the Bank of England an inflation target when it gave us independence in 1997. In the 25 years since, the rate of inflation has averaged 2% - our current target. But, as we’ve seen, it’s much higher than that now and that’s why we’re taking action to bring it back to our target.

The main way the Bank of England can control inflation is by changing interest rates. Interest rates have been at record low levels for many years. We reduced them to support the economy and protect people’s jobs during the financial crisis and more recently during the Covid pandemic.

Now inflation is our biggest challenge. And the way to combat inflation is by raising interest rates from the very low levels they have been at in recent years. The Bank of England has been doing this since December last year.

How interest rate changes affect you partly depends on if you are borrowing or saving money.

When interest rates rise, it’s more expensive for households and businesses to increase the amount they borrow but it’s more rewarding to save. Both of those things reduce how much people spend overall. This helps to push inflation down.
But higher interest rates don’t work straight away. They take time to take full effect. So when we use them, we always look at what will happen in the economy over the next few years, not just what’s going on now.
We know many people will find this hard because it makes borrowing money more expensive.
Increasing interest rates won’t tackle the main causes of the high price rises we’re seeing at the moment. But it will reduce the risks of the current high inflation lasting for longer which would inflict even greater pain on households over a number of years.
Our aim is to get inflation back towards the 2% target set by Parliament over the next couple of years. Doing this will help everyone in the UK.
These are tough times and the Bank’s policymakers are having to make tough decisions. We will be held accountable for them by Parliament.

Next week you will have the chance to ask us directly about our decisions when we hold our latest Citizens’ Panel at Durham County Cricket Club in Chester-le-Street.
I will be joined at the event next Tuesday by colleagues from the Bank including one of our Deputy Governors, Sam Woods.
Please take the opportunity to come and tell us about your experiences and ask us any questions you have.
I look forward to seeing you there.

You can register here - but please act soon as registration closes at 5pm tomorrow (Thursday).

Read next:

• What time does the cost of living payment go in?
• The one thing you should do before energy price cap increases
• Cost of living crisis: Students could quit courses without help say universities