Inflation passes 4% mark
Inflation hit 4% in January, double the government's 2% target.
The jump in consumer prices index (CPI) inflation from 3.7% in December has prompted more calls for the Bank of England to increase interest rates.
The Bank of England uses inflation to set interest rates. If it expects inflation to fall below 2% (the target figure) over the next year it will cut interest rates. If it expects inflation to be above the 2% target over the next year it is likely it will increase interest rates to try to subdue it.
Retail prices index (RPI) inflation - which includes mortgage interest payments - also rose from 4.8% to 5.1%.
What does the rise mean for you?
Q. What is inflation?
Inflation is the rate at which the price of products and services rise. The main measures of inflation are the CPI and the RPI. They look at the price of thousands of products and services and monitor how their prices change each month. The main difference between the two is the RPI includes costs related to housing (in other words mortgage payments) while the CPI does not.
Q. Who is hardest hit by the rise?
At the moment, savers will be hit hard. With interest rates so low and inflation on the increase savings are losing their purchasing power. The products and services we buy are rising in value but the money used to buy them is not. However, anyone with a tracker or on a lender's SVR should start thinking about fixing before interest rates rise.
Q. What should you do?
Savings rates are pretty poor across the board but if you've not tried finding a new home for your savings since the credit crunch hit it's worth checking around to see what is on offer. Remember though, interest rates are likely to start rising at some point this year so locking your savings into a fixed bond now may not be the best move.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.