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As inflation falls we explain how this affects your spending power and wage negotiations.

Page last updated Tuesday, 20 March 2012

008-deflationAs the UK Consumer Prices Index (CPI) annual rate of inflation fell to 4.8% in November, down from 5% in October 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)

The largest downward pressures came from food, petrol, clothing and furniture, household equipment & maintenance. Bread and cereal prices dropped marginally when compared to a sharp increase a year ago. Vegetable prices fell by 1% for the previous two months which is the biggest fall for a decade. Chocolate, sugar, jam and sweets also became cheaper.

Partially offsetting these were upward pressures from increases in the cost of domestic heating and off sales of alcohol.

Each month the ONS examines a ‘basket’ of 600 different items and services from over 100,000 different retail outlets and then determines the rate of increase or decrease.

CPI which is the Government's preferred measure of inflation does not include council tax or mortgage interest costs, buildings insurance, house depreciation  and other house purchase cost such as estate agents' and conveyancing fees.

Retail Prices Index (RPI)

RPI annual inflation stands at 5.2 per cent in November 2011, down from 5.4 per cent in October. The largest downward pressures came from food, petrol, furniture and clothing. Partially offsetting these were upward pressures from wines & spirits off sales and fuel & light.

The Bank of England target for inflation is two per cent and they expect inflation to fall back sharply in 2012, with the possibility of it being below the two per cent target by the end of the year.

Impact on consumers

Starting from April 2011, CPI is to be used in place of RPI for increasing state pensions and other benefits. Many see he change as unfair as CPI is now lower than RPI (the previous index used). By changing the index many consumers will receive less of an increase to their wages, pensions or benefits.

Full report can be found at: statistics.gov.uk

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