to ease the cost of living

and give people financial security.

- [Narrator] That was UK Prime Minister Rishi Sunak

at the beginning of the year

pledging to cut inflation in half,

which at that time was 10.5%.

Inflation has since fallen to 8.7%, which is good,

but experts and officials

are more interested in something else, core inflation,

which has actually risen since the start of the year.

What's behind that rise?

And what does it mean

for Rishi Sunak's big pledge? (audience applauding)

First, it's important to understand the difference

between core inflation and headline inflation.

- Headline inflation is the classic benchmark

for consumer prices.

It calculates an index based on stuff that we buy,

like food, energy, rent, clothes,

and a whole bunch of other stuff.

Core inflation strips out the more volatile things

like food and energy,

and this is the metric that the Bank of England

is closely watching right now.

- [Narrator] UK headline inflation is falling,

but at a slower pace than of a major economies.

It's still twice as high as in the US.

The UK's core inflation, meanwhile,

is traveling in the opposite direction.

It's now at its highest level since 1992,

fueled by higher wages and corporate profits.

- One of the big drivers of this is services,

so that's prices for things like air travel,

cultural goods, other kinds of services.

This is in contrast with the US and the Eurozone

where core inflation has been coming down recently.

In the US, one of the big reasons for this

was the cooling of housing rental prices.

- [Narrator] Persistently high core inflation

could make the Prime Minister's goal harder to achieve.

The Treasury Chief says, "The target of around 5% inflation

is still possible, but it won't be easy."

- I think the sweet spot for the UK economy

in terms of our long-term competitiveness

is if we can do the best of what European countries do

in terms of investment in skills,

investment in infrastructure,

but have that US

dynamism, innovation, spark

- [Narrator] Hunt's desired sweet spot

will in part depend on if that core inflation rate

can start to follow the US and Eurozone

in a downward direction.

The government is supported in its efforts

by the Bank of England.

The Central Bank sees raising interest rates

as its best tool to bring inflation down

to its own 2% target.

It has been raising the rate since the end of 2021.

This makes borrowing more expensive,

which leads to people having less money to spend,

which lowers demand on goods,

and ultimately, slows prices.

- Central Banks have had a really difficult job recently,

they've been trying to tame inflation

with interest rates being their main tool,

but they also have to try to raise interest rates

without damaging the economy too severely.

So it's about finding this delicate balancing act.

In the US, we've seen the Fed pause interest rates

while it's assessing the impact of his latest hikes,

but it does look like in the UK

because of this persistently high inflation,

the BOE is unlikely

to be able to pause its hiking cycle anytime soon.

(tranquil music)