UK news is full of stories depicting the state of the economy.

With interest rates rising, mortgages falling through, and energy prices threatening a blackout, it’s no wonder people are confused about what is happening.

To help understand what is happening, we look at some of the top questions currently surrounding the UK economy.

What is inflation and how does it affect me?

Inflation refers to a general increase in prices and a fall in the purchasing value of money.

When the general price of items rises during inflation but the value of money stays the same, consumers can buy fewer items and goods for the same monetary sum.

Therefore, higher inflation would mean people's money would have less and less purchasing power.

As a result, savers may suffer and households may find it harder to stay within their budgets.

Some of the most noticeable effects of inflation have been seen in increasing food and fuel prices.

Falmouth Packet: What is happening to the UK economy and how will it affect me? (PA)What is happening to the UK economy and how will it affect me? (PA) (Image: Newsquest)

What are interest rates and why are they going up?

According to the Bank of England, interest rates are going up due to the rapid increase in inflation.

Inflation is the rate at which the prices of goods and services increase, so to keep this low and stable, the bank must increase interest rates.

This is commonly known as ‘the base rate’ or just ‘the interest rate’.

Bank Rate influences all the UK’s other rates, including those you might have for a loan, mortgage, or savings account.

The Bank of England raised the Bank Rate from 0.1% last December, to 2.25% now. The most recent increase of 0.5 percentage points happened on 22 September of this year.

The Bank of England has said that rising energy costs are the main reason why inflation is so high currently.

It said: “In particular, Russia’s invasion of Ukraine led to big increases in the price of gas. The war in Ukraine has also increased food prices.”

The Government cap on energy bills means that the bank now expects inflation to rise slightly further.

The rate of inflation is currently about 10% with it expected to rise to about 11% in October.

After that, the bank estimates it will stay above 10% for a few months, before starting to fall.

What is the energy price cap and why are prices increasing?

To limit the cost of energy bills, the Government has introduced an energy price cap, set by Ofgem.

The energy price cap limits the maximum amount energy suppliers can charge you for each unit of energy you use if you live in England, Scotland, and Wales.

The current energy price cap is 34.00p per kWh for electricity and 10.30p per kWh for gas. This means that the typical household should not spend more than £2500 a year on energy bills.

Ofgem has said that costs are high now because we are facing a “once in a 30-year event with volatile gas prices” which is affecting everyone around the world.

Because of this, the price that suppliers have to pay to buy the energy on the wholesale market is much higher.

Gas is also used to generate electricity, which is why electricity prices are high too.

Why are mortgage rates going up?

If you’re in the process of buying a house or looking to soon, you’ll be well aware that mortgage rates are also increasing at a rapid rate. But why?

According to Money Super Market Expert, the rise in mortgage rates is down to a number of factors. One of these is the Bank of England raising the base rate that we mentioned earlier.

A rise in interest rates means a rise in mortgage rates, which means the amount you pay monthly will go up.

There has also been a big increase in government bowering to lower the energy bills and announcements from the recent mini-budget, which jerked the money markets.