As UK inflation for July fell to 3.1% from 3.2% in June, we explain why and the difference between CPI and RPI. We also detail what impact both measures have on consumers.
The Consumer Prices Index (CPI) - measure used by Bank of England to set interest rates
Consumer Prices Index (CPI) annual inflation dropped to 3.1% from 3.2% in June according to the Office for National Statistics (ONS). This is still well above the target of 2 per cent set by the Government. The is the third month in a row that inflation has fallen.
CPI is used by the Government to measure inflation. It does not include council tax or mortgage interest costs.
Transport costs (particularly prices of secondhand cars and fuel) are the largest driver to the decrease in annual inflation between June and July. Other large downward contributions came from clothing and footwear, miscellaneous goods and services, and recreation and culture.
The main upward pressures to inflation between June and July came from food and non-alcoholic beverages, and furniture and household goods.
Retail Prices Index (RPI) - measure used as a benchmark in wage negotiations
Figures published today by the ONS also reveal that annual inflation measured by the Retail Prices Index (RPI) - which includes housing costs such as mortgage interest payments and council tax fell to 4.8% from 5.0% on the month before.
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.
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.
Inflation may be kept high over the coming months by high by fuel prices and VAT increases however some commentators believe that long term inflation will fall back sharply which could add a real risk of an extended period of deflation.
Full report can be found at: statistics.gov.uk
DebtWizard comment
With inflation running at 5% (RPI), which includes housing costs, and employees average earnings only rising by just over 1%, whilst others receive a pay freeze, you can see how consumers are being hit hard. Simply put this means consumers will have less spending power which in turn will slow down the drive in the economy.
