Inflation falls to 2.4%
Consumer prices inflation fell to 2.4% in June, down from 2.8% in May, thanks to a drop in the price of clothing, transport and food.
The Consumer Prices Index (CPI) measure of inflation is now at its lowest level since November 2009.
The Retail Prices Index (RPI), which includes mortgage interest payments, fell by 0.3% to 2.8%, due to the falling price of fuel. However, the rising cost of housing and leisure goods put pressure on the RPI.
Azad Zangana, European economist at Schroders, says that the UK's inflation rate "is only just beginning to reflect the weakness in the economy".
"Past increases in taxes have caused a squeeze on household spending power, which in turn is forcing retailers and service providers to scale back price increases," he says.
Zangana adds: "Overall, the latest inflation numbers help justify the Bank of England's decision to expand its quantitative easing programme earlier this month, and could even lead the Monetary Policy Committee to add further stimulus in the future."
From a savings perspective, a basic-rate taxpayer now needs a savings account paying 3% a year, according to Moneyfacts, while a higher-rate taxpayer needs an account paying at least 4% to negate the effects of inflation.
Sylvia Waycot, spokeswoman for Moneyfacts, says that the fall in CPI is welcome, although not enough to cause celebration for savers.
"Today's news means that there are now only 278 out of 1,122 standard savings accounts that negate the effects of tax and inflation. The silver lining is that last month there was a choice of only 210 accounts," she adds.
This article was written by our sister website Money Observer
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.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
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).
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.