The annual rate of inflation, as measured by the Consumer Prices Index (CPI), fell slightly in August to 1.5%. That’s down from July’s figure of 1.6%.
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What's behind the change?
The main reason for the slight drop was discounting in food and non-alcoholic drinks as supermarkets battle for our custom. The price of milk, cheese, eggs and yoghurt has shown the greatest decrease.
The second largest contributor was the cost of petrol and diesel, which fell due to oil being cheaper.
The largest increases came from clothing, transport services and alcohol.
This keeps the figure well below the Bank of England’s target of 2% and means there is no pressure from this direction for the Bank to raise interest rates.
The Retail Prices Index, which includes things such as mortgage payments and Council Tax that are not included in the CPI measurement, was at 2.4% in August, down slightly from 2.5% in July.
Of course, your own rate of inflation may be very different, depending on your age and what you spend your money on.
Why inflation matters
Inflation affects our spending power. The more prices rise, the less we have to spend, particularly if wages don’t keep up with price increases, as they’re not at the moment.
If you have money saved or invested and your rate of return is not beating inflation then you're actually losing money over time.
The CPI figures are also used to uprate benefits such as the State Pension, the Disability Allowance and Carers Allowance.
RPI is used to set annual increases in things such as fuel duty (although it isn’t at present), alcohol and tobacco duty, regulated rail fares (although the Government can and has intervened), interest on student loan repayments, and water and sewerage charges.
And the Bank of England uses the inflation figures as a barometer of the health of the UK economy and adjusts its monetary policy accordingly. Interest rates can be raised to combat high inflation, which in turn feeds through into our borrowing costs for things such as mortgages and credit cards, and equally can improve returns on savings.
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