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How does raising interest rates help inflation? | Personal Finance | Finance

In February the cost of living soared to a new 30-year-high for British residents, laying bare the challenge for Chancellor Rishi Sunak ahead of his Spring Statement on Wednesday. Mr Sunak is expected to announce plans for how the Government aims to support households who are already struggling to meet rising costs.

In the 12 months to February, prices rose by 6.2 percent on average, owing to sharp growth in the value of food, fuel and energy.

The Bank of England has predicted that by the end of 2022 inflation could reach double figures.

According to the Office for National Statistics (ONS), gas prices were almost a third higher last month than compared to a year ago, and electricity prices were up by nearly a fifth.

Traditionally, the Bank of England responds to rising inflation by swelling interest rates, which it has already done three times in the past few months.

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Why are prices rising?

The primary reason is the rising global price of energy, which in turn has pushed the energy price cap to grow by 54 percent from the start of April.

Gas prices in particular have risen sharply over the past year, but the Resolution Foundation has warned that the Ukraine conflict is making the situation much worse.

Their report said: “The crisis in Ukraine has increased both the scale of price rises, but also the degree of uncertainty about their levels and duration.”

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