Inflation slows in October
At the same time, the retail prices index (RPI), which includes council tax and mortgage payments, slowed from 5.60% to 5.40%.
The drop comes following a month of falling food prices due to a price war between the supermarkets and drops in airfares and petrol prices. Unfortunately, the fall wasn't larger due to the rising cost of clothing, electricity and gas, according to the Office for National Statistics.
Inflation may have fallen slightly but "it's far too early for savers and pensioners - and people generally - to hang out the bunting," says William Hunter of Hunter Wealth Management. "If there's one trend in the current environment, it's the volatility of monthly figures. One month's rise can be followed by a fall and vice versa."
Despite the drop, both figures remain incredibly high – they are more than double the Bank of England's target for inflation, which is 2%.
Little improvement for households
The small fall in inflation will do little to curb the problems facing most households – balancing rising bills with stagnant salaries. Research from moneysupermarket.com reveals that people are spending 27% of their income on essential bills such as utilities, telecoms and insurance.
"Although inflation fell this month it is still high. This combined with salary freezes across many industries, means it's no wonder many households are spending such a huge proportion of their income on essential bills," says Kevin Mountford, head of banking at moneysupermarket.com.
"Once other costs such as mortgage/rent payments, debt repayment and transport costs are factored in, many British consumers are left with very little money to play with each month."
The picture is also grim for savers.
"The small drop in inflation announced today will not be enough to curb the woes of the nation's savers," says Sylvia Waycot, spokesperson for Moneyfacts. At the current rate of inflation, a basic-rate taxpayer would need an account paying 6.25% to beat inflation and a 40%-rate taxpayer would need to find an 8.33% interest rate. Neither of these exist. The best option available to savers is an inflation-linked account.
There is one group who will greet the small fall in inflation with jubilation – the Bank of England's monetary policy committee; the drop relieves pressure on Bank governor Mervyn King to tackle inflation.
James Igoe, private client director at stockbroker XCAP, says: "Mervyn King will rightly feel more justified in keeping his anti-inflationary weapons firmly in their cabinet for a while longer."
But the good times for Mervyn are unlikely to last. The major factor behind this month's inflation drop is the aggressive price war taking place between the supermarkets and that can't last forever.
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.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
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).