The Consumer Prices Index (CPI)

Consumer Prices Index (CPI) annual inflation fell to 1.8 per cent in June, down from 2.2 per cent in May and the first time it has fallen below the Government’s 2 per cent target since September 2007.

CPI is used by the Government to measure inflation. It does not include council tax or mortgage interest costs. The concern is that CPI could fall further in the coming months.

The largest downward pressure on the CPI came from food and non-alcoholic drink prices, which fell between May and June this year but increased over the same period last year. Within the category, the downward pressure came from meat, bread and cereals, fruit, vegetables and milk, and cheese and eggs. There was also a smaller downward effect from sugar, jam and confectionery.

Retail Prices Index (RPI)

Figures published today by the Office for National Statistics also reveal that annual inflation measured by the Retail Prices Index (RPI) - which includes housing costs such as mortgage interest payments and council tax – was -1.6 per cent, compared with -1.1 per cent in May. This is the lowest RPI figure since records began in 1948.

RPI is used to negotiate wage increases, pensions, state benefits and index linked guilts.
Either one of these inflation measures can have a major influence on the economy as they will affect interest rate decisions, pensions and wage settlements.

Some economists are worried that RPI move deeper into deflationary territory.

What is deflation?

Deflation occurs when prices are declining over time. This is the opposite of inflation; when the inflation rate (by some measure) is negative, the economy is in a deflationary period.

The worry is that consumers will keep putting off the purchasing goods, because of deflation, in the hope that the item will drop in price even further.