As the Office for National Statistics (ONS) reports falling inflation 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)

CPI annual inflation stands at 2.5 per cent in August 2012, down from 2.6 per cent in July. The largest downward pressures behind the change in the CPI rate came from furniture, household equipment & maintenance, housing & household services (particularly domestic gas) and clothing & footwear. These were partially offset by an upward pressure from transport (particularly motor fuels).

September last year was the last time inflation peaked, which then was 5.2%.

Basket of 600 different items

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)

The Retail Prices Index (RPI) annual inflation stands at 2.9 per cent in August 2012, down from 3.2 per cent in July. The largest downward pressures came from household goods, clothing & footwear and food. The only significant upward pressure came from fares & other travel costs.

RPI measure includes mortgage interest payments.

The Bank of England Target

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

It is hoped that lower inflation will help cash-strapped consumers, who have been hit by high prices and low wage growth increase their spending ability, which will in turn boost the economy.

Many analysts say that lower inflation is crucial to the UK's economic recovery.

State pensions, wages and benefits

Starting from April 2011, CPI is to be used in place of RPI for increasing state pensions and other benefits. Many see the 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.