INFLATION has been steadily falling but that doesn't mean prices are dropping too. There are a number of online calculators that can give you a rough idea of just how much price rises may affect you.
Inflation dropping doesn't mean prices are dropping too
It comes as inflation fell again to 6.8% in the year to July, according to the Office of National Statistics (ONS). The consumer price index (CPI) measure of inflation fell from 7.9% in June. It means prices are still rising but at a slower rate than before. Inflation is a measure of how the price of goods and services has changed over the past year.
What is inflation?
Inflation is a measure of how much goods and services are worth in a given period. This means how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time. It is known as a "backward-looking measure", which means it indicates what has happened over the past year. That obviously means that it does not predict the future. The rate of inflation is published each month by the ONS. It's a non-ministerial department which reports directly to Parliament.
How does inflation impact prices?
Inflation doesn't impact prices, rather it's a measure of how prices have changed over the past year. When it goes up, it means prices on everyday items, essentials, fuel and bills are higher. That means millions of households' budgets are squeezed.
What inflation calculators can I use?
The calculators available can show you how prices have changed over time. There are several to choose from:
Bank of England: The Bank of England's inflation calculator allows you to see what goods and services will cost you. You can type in a monetary amount, a year, and then compare it to this year.
Office for National Statistics: The ONS' calculator estimates a personal inflation rate based on your spending patterns. It then compares this with what inflation actually is. Users will be asked how much they spend on groceries, housing, transport, and leisure.
Hargreaves Lansdown: Hargreaves Lansdown's calculator lets customers find out the growth rate needed for their savings to keep up with inflation. It essentially shows how much your savings are worth following a rise or drop in inflation. Users can input the amount of money they have along with a random month a year and then compare it to what it is worth today.
Rathbones: Rathbones' inflation calculator helps people compare their personal inflation rate to that experienced by the average consumer. They'll need to provide information on their monthly and annual spending including eating and drinking out, travel, medical costs, and more.
How is the inflation rate set?
The inflation rate depends on how the prices of a basket of goods and services have changed over the past year. Inflation is measured by the ONS, which collects around 180,000 prices of about 700 goods and services used across the country. These prices are updated every month with officials visiting the same retailers each time to ensure consistency. The prices are then weighted with more prominence being given to products people buy more often, such as fuel rather than postage stamps, for example. There are numerous different measures of inflation that all track slightly different baskets of goods. The main measure is known as the Consumer Prices Index (CPI), and state benefits and the state pension also rise in line with it. There is also a Consumer Prices Index including housing costs (CPIH) measure, as well as a Retail Prices Index (RPI) measure, which is used to calculate annual rail increases and student loan interest rates among other things.
What does inflation mean for prices and the economy?
Inflation matters because it affects the value of wages, savings, and more. The Bank of England has a target inflation rate of 2%. This target is set by the government, which believes a small amount of inflation at a stable level is good for the economy. That's because it boosts economic output by encouraging spending, which in turn means businesses can afford to generate employment opportunities. It can also make goods more attractive to foreign buyers as it can make their currency worth more, comparatively, to other countries. However, if inflation is too high or goes up and down a lot, it can be hard for businesses to set the right prices and for people to plan their spending. It can also mean the cost of essential goods and services can suddenly outstrip the buying power of people's wages – this is what we are seeing in the current cost of living crisis. At the other end of the scale, it's also a problem if inflation is too low or negative, as people may put off spending because they expect prices to fall further.
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