Inflation
Chart Showing Iinflation
Inflation is defined and measured as a sustained and yearly percentage increase in the general level of prices for goods and services. As inflation rises, the pound value (observed in terms of purchasing power of real and tangible goods that money can buy) drops and buys a smaller percentage of goods or services. When inflation goes up, the decline in purchasing power of money is imminent.
In United Kingdom, the RPI and CPI draw inflation estimates but differ in its method of calculations and resultant values.
Sometimes referred to as “headline” rate of inflation, the Retail Price Index (RPI) is better known in UK and unions cite the RPI rates as a benchmark for pay settlements.
The Consumer Prices Index (CPI) covers a broad sample of the population for its calculations and supply realistic reports on consumer behaviour and spending patterns. The CPI is the international comparable measure of inflation and according to the UK Government, is the better measure for setting monetary policy.
The annual rate of UK inflation is at its highest level since 1997. While rising oil prices continue to increase transport and packaging costs, poor harvests and global warming has reduced food supplies and increased factory input prices.
This has increased UK inflation to 3.8%, which is much higher than the Government’s current CPI target of 2%. Bank of England estimates inflation above 4% this year and this may reduce the chance of UK rate cut altogether.
It is hoped that, with the reduced oil prices in the next year, subdued domestic spending and falling house prices, inflationary pressures will moderate.