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News
What inflation really means
Inflation erodes the value of your savings because, as prices rise, the same money buys you less. So unless your investments are growing faster than prices, you are losing money in real terms.
It is hard to open a newspaper or magazine without being told of strange inflation behaviour. Whether inflation is slowing down or speeding up, is too high or too low, there have been plenty of doom-laden headlines in recent months. One measure struck 5.2% a year ago in October 2008, its highest for 16 years and more than twice the Bank of England's target of 2%. Since then it has dropped right back down, and was just 1.8% in July.1
While that is reassuring, it is also important to remember that there is more than one way to measure inflation, and that the rate favoured by the Bank of England today is not the one most of us are used to. In 2003 the Bank switched from targeting the RPIX measure of retail prices minus mortgage costs to using CPI, or consumer price inflatlon.2 At the time of writing, the RPIX was running at Just 1.2%.
The most relevant measure of inflation for you is the one that most closely matches your expenditure, and for many of us, that is neither of the above: it is the RPI measure of retail prices, also known as 'cost-of-living inflation'. RPI includes many expenses that are really relevant to day-to-day living, such as council tax. The good news for your savings is that the RPI is, at time of writing (October), negative at -0.8%.3
Independent control
Also worth remembering is the Bank of England's remarkably consistent record for hitting its 2% inflation target. Since the Bank gained independence from political tinkering in 1997, inflation has been extremely stable. The fluctuations triggered by the credit crunch, while alarming, represent the first really volatile period seen since politicians were barred from interfering with interest rates."
1 . Bank of England inflation report, August 2009 and Guardian, 2008.
2. Office for National Statistics, August 2009.
3. Office for National Statistics, November 2009.
4. www.commansleader.gov.uk, November 2009.
Inflation erodes the value of your savings because, as prices rise, the same money buys you less. So unless your investments are growing faster than prices, you are losing money in real terms.
It is hard to open a newspaper or magazine without being told of strange inflation behaviour. Whether inflation is slowing down or speeding up, is too high or too low, there have been plenty of doom-laden headlines in recent months. One measure struck 5.2% a year ago in October 2008, its highest for 16 years and more than twice the Bank of England's target of 2%. Since then it has dropped right back down, and was just 1.8% in July.1
While that is reassuring, it is also important to remember that there is more than one way to measure inflation, and that the rate favoured by the Bank of England today is not the one most of us are used to. In 2003 the Bank switched from targeting the RPIX measure of retail prices minus mortgage costs to using CPI, or consumer price inflatlon.2 At the time of writing, the RPIX was running at Just 1.2%.
The most relevant measure of inflation for you is the one that most closely matches your expenditure, and for many of us, that is neither of the above: it is the RPI measure of retail prices, also known as 'cost-of-living inflation'. RPI includes many expenses that are really relevant to day-to-day living, such as council tax. The good news for your savings is that the RPI is, at time of writing (October), negative at -0.8%.3 Independent control
Also worth remembering is the Bank of England's remarkably consistent record for hitting its 2% inflation target. Since the Bank gained independence from political tinkering in 1997, inflation has been extremely stable. The fluctuations triggered by the credit crunch, while alarming, represent the first really volatile period seen since politicians were barred from interfering with interest rates."
1 . Bank of England inflation report, August 2009 and Guardian, 2008.
2. Office for National Statistics, August 2009.
3. Office for National Statistics, November 2009.
4. www.commansleader.gov.uk, November 2009.