Inflation drops again in November
The secondary measure of inflation, the retail prices index (RPI), which includes mortgage payments and council tax, has also dropped 0.2%. It is now 5.2%.
Vicky Redwood, chief UK economist for Capital Economics, says anecdotal evidence suggests that low consumer demand is forcing retailers to discount prices.
CPI slightly dropped in November thanks to reductions in prices of food, petrol and household costs.
Despite the slight changes in both inflation measures, inflation remains over double the Bank of England's 2% target inflation rate.
"Inflation has fallen but this is nothing more than a flicker of light in the pitch-dark roll-call of the global economy," says Marcus Bullus, trading director at stockbrokers MB Capital. He says these figures will offer little help to the markets.
Savers continue to be adversely affected, with basic-rate taxpayers now needing to find accounts paying 6.01% to beat inflation. A higher-rate taxpayer would need to find an account paying 8.01% interest.
"Over the past year, the number of savings accounts that beat inflation for basic-rate taxpayers has dropped successively from 57 to absolutely none, which must leave savers wondering why they save at all," says Sylvia Waycot, spokesperson for Moneyfacts.
"This means more and more people are falling into the 'eroding spending power trap', which has already wiped nearly £800 off the spending power of £10,000 in just five years," Waycot adds.
The inflation rate is expected to fall further in 2012.
"There is still a lingering risk that inflation will pick up again in December, but come January - when the VAT rise drops out - it should start to fall like a stone. We still think inflation will be below its target by the autumn, before dropping to 1% or lower," says Redwood.
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.
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).