Is the cost of living crisis over?
If you’re looking purely at the annual inflation data, the numbers us journalists, not to mention politicians and economists, tend to focus on, the answer might seem like: probably, yes.
Sure, the rate is, at 3.4% in May, higher than the Bank of England’s 2% target. But it’s far below the double-digit peaks experienced in 2022. Plus, the Bank itself thinks prices are likely to drop back down towards 2% in the coming year or two, even assuming a few more interest rate cuts. End of story, right?
Money blog: Latest inflation data ‘uncomfortable reality check’ for home buyers
Well, not quite. Because look a bit deeper into the numbers and you notice a couple of important things.
The first is that whether the cost of living squeeze is over really depends on how you slice up the numbers. Look in a slightly different way and actually this is still an ongoing crisis for millions of families around the country.
An ongoing crisis
To see what I mean, recall that when economists talk about inflation, they are really referring to something quite specific. The rate at which the average level of prices across the economy (actually, it’s a shopping basket of representative goods) has changed over the past year.
And the change in that level over the past year is indeed 3.4%. But look back a bit further, say the past four years, and the rate of change is 25%.
Why looking back makes sense
Both of these numbers are accurate. They are both expressions of inflation, except that one is for a single year and the other is for a four-year period. But when you’re going to the supermarket, or buying a big ticket item like a computer or a car, are you really thinking back over a 12-month horizon or, perhaps, thinking back further?
For a lot of people, that four-year horizon feels much more representative of their everyday lives and retail decisions than the one-year horizon. True: the fact that it’s up 25% is largely because of the…
