Cost of living slows in May
Falling food inflation led to another fall in the cost of living in May, official figures today reveal.
The Consumer Prices Index (CPI) – the official measure of inflation – fell to a rate of 2.2% in May, down from 2.3% the previous month. The Bank of England’s official inflation target is 2%, although it has warned the CPI is likely to undershoot this over the next year.
However, the Retail Prices Index (RPI) – another measure of inflation that also includes mortgage interest payments – rose during the month from -1.2% to 1.1%. RPI turned negative last month after hitting zero in March.
The first in RPI reflects the fact that average mortgage interest payments and buildings insurance premiums were higher in May than they were in the same month last year.
The figures came as a surprise to economists, many of whom expected CPI to fall below 2% this month and RPI to remain negative.
Jonathan Loynes, chief European economist at Capital Economics, describes the figures as "a bit disappointing". However, he remains convinced that the cost of living will continue to slow in the months ahead.
Two of the upwards pressures on prices (see list below) were alcohol and tobacco costs. However, this can be explained by the duty increases announced in April's Budget.
Charles Davis, economist at the Centre for Economic Business Research, says: "The inflation figures have surprised on the upside; inflationary pressures are more persistent than expected. However, inflation is likely to fall further in the coming months in contrast with the period from May to September last year when inflation rocketed. We still expect inflation to undershoot the 1% mark."
And Loynes adds: "We still think that core inflation will fall sharply over the next year or so in response to the general weakness of demand."
He also predicts that food prices will fall "considerably further".
Mortgage interest payments
Building insurance premiums
Clothing and footwear
Leisure services – particularly DVDs and televisions
Food – particularly meat, vegetables, bread and cereal
Furniture, household equipment and maintenances
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).
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).
This type of insurance covers the structure and fabric of your property – the bricks and mortar, not the contents (for which you need contents or home insurance). If you have a mortgage, the lender will insist you have a suitable buildings insurance policy in place. Many lenders offer their own building insurance policies, but you don’t have to buy it from your own lender but you have the option of shopping around. The insurance covers you for the rebuilding costs, not the market value of the property.