25 March 2009

Basics on Inflation

Inflation (and its sibling deflation) has been the headache of most world economies in recent times. It gets frequent mentions in the daily news, but what is it?

In the UK, inflation is measured in a number of ways. One is the RPI, or Retail Prices Index. The other key one is the CPI, or Consumer Prices Index. It was this latter measure, the CPI, that rose yesterday. The RPI actually fell, mainly due to falling numbers in mortgage repayments.

Monetary policy is based on the CPI. So, changes in the CPI affects the governments, Bank of England, currency markets, businesses, and you and me.

Inflation affects the value of your money. If inflation goes up, your money will buy you less. Easy as that.

Once a month, the Office for National Statistics (or ONS) collects 120,000 of services and products from a range of retailers around the UK. Then it must check that its indices provide an accurate picture of the price fluctuations around the country. This is repeated every month with the same retailers and the same products.

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