Inflation hits zero
This is the first time in 49 years that inflation has reached the zero mark.
Although the Consumer Prices Index (CPI) - the official measure of inflation - rose slightly in February, the Retail Prices Index (RPI) - which includes housing costs and council tax - fell to 0% from 0.1% the previous month.
Economists tend to consider the RPI a more accurate measure of inflation, because it includes important factors such as mortgage interest rates and house prices, which the CPI does not.
The CPI peaked last September at 5.2% and has been steadily falling ever since, hitting 3% in January. Although this was largely expected to fall further in February, the Office of National Statistics reports that the CPI rose to 3.2% in February.
It pins the change of direction on rising food and drink, recreation and transport prices - suggesting that the high street is not as weak as previously thought.
The rise in the CPI means the governor of the Bank of England, Mervyn King, will have to pen his 5th letter to the chancellor Alistair Darling explaining why official inflation remains more than 100 basis points above its 2% target.
Despite the rise in CPI, the UK is still expected to enter a period of deflation at some point in 2009, for the first time since the end of the Second World War.
Vicky Redwood, UK economist at Capital Economics, says: "The big picture remains that deflation is on its way. After all, at zero in February, the RPI measure was as close to deflation as you can get."
And despite the unexpected rise in the CPI, Redwood believes even this measure of inflation will turn negative down the line: "A significant rebound in core price pressures looks unlikely when the economy is contracting so sharply. Accordingly, falling utility and food price inflation should still push CPI into negative territory before long."
Food - particularly the price of vegetables, fruit, bread, cereals and meat
Nonalcoholic beverages – including mineral water, soft drinks and juices
Recreation and culture – particularly games, toys, hobbies, computer games and pre-school activity toys
Transport - the average price of petrol rose by 3.2p per litre between January and February, to stand at 89.5p
Housing and household services – including gas and electricity bills
Housing costs - notably mortgage interest payments and house prices (note, this only applies to the RPI)
Coffee, tea and cocoa
How much is your money worth?
Generally speaking, there are three measures of inflation:
1. The CPI, which is used by the government and the Bank of England
2. The RPI, which includes housing costs. Most economists say this measure is more accurate
3. Your personal rate of inflation
There is an arguement that states people should really ignore the first two rates of inflation. For one, many of the things we have to pay for - such as council tax or gas and electricity - increase at a rate higher than inflation.
But, even more importantly, affects different groups of people, depending on their age and social-ecomomic status, among other factors.
Your personal rate of inflation will depend on how much of your income you spend on specific items, and what the rate of inflation is for those items.
The general rule is that the less wealthy suffer the most, because they don’t have surplus income to absorb rising costs. Retirees are the hardest hit of all because they have a fixed income and a large proportion of this is spent on necessities such as utilities and food.
However, wealthier middle-classes aren’t immune. Areas where they spend money, such as school fees, childcare and private healthcare are all rising well above inflation too.
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).