Cost of living starts to slow
Inflation appears to have peaked with the cost of living standing at 4.5% during October, down from 5.2% in September.
The Consumer Price Index (CPI) – the official measure of inflation – has been steadily rising all year well beyond its target of 2%, largely as a result of higher crude oil and food prices. However, with crude oil costs falling since August, and food prices also on the way down, the CPI is also falling.
The Office for National Statistics (ONS), which publishes the figure, says that cheaper fuel is one of the biggest factors bringing inflation back down. The average price of petrol fell by 7.1p per litre between September and October, to stand at 104.5p, compared with a rise of 2.7p last year.
Cheaper fuel has resulted in a large fall in the cost of transport including air and sea travel. In addition, the falling cost of food and non-alcoholic beverages has also helped calm inflation.
The Retail Price Index (RPI) – which includes mortgage interest payments – also slowed in October to 4.7% from 5.5% in September. The fall was largely down to cheaper motoring costs, as well as falling house prices.
Jonathan Loynes, chief European economist at Capital Economics, says the dip in inflation could result in prices actually falling with the first period of deflation in more than 60 years.
“We had been prepared for the core rate to rise in October and over the following few months as previous sharp cost increases continue to feed into the high street. But it looks like strong competitive pressures and the slowdown in demand might be preventing that from happening – seriously bad news for retailers’ profit margins.
“Overall, great figures which support our view that CPI inflation will turn negative in about a year’s time.”
Despite the cost of living appearing to be starting to slow, CPI remains well above its 2% target. And households hit by higher energy bills and food prices during 2008 may not see much benefit from lower inflation just yet.
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.
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).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
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).