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What is inflation?

Inflation affects everything from mortgages to the cost of our shopping and the price of train tickets.



It is why some rail season tickets, pegged to inflation, are expected to rise by more than £100 next year.


So, what is inflation and what impact does it have?


What is it used for?

Inflation is one key factor the Bank of England considers when setting the "base rate". That influences what interest rate banks can charge people to borrow money, or what they pay on their savings. If it thinks inflation is likely to be below 2%, it may cut interest rates to lower the cost of borrowing and therefore encourage spending. Inflation also has a direct impact on some people's incomes. State benefits and many occupational pensions rise in line with Consumer price index (CPI). The basic state pension is currently governed by the so-called triple-lock - rising by the highest of CPI, average earnings or 2.5%. As well as the cost of some train tickets, repayments on student loans and bonds issued by government are also pegged to Retail Price Index.


Wage comparisons to inflation...

Economic growth occurs due to people buying more and the rate of wages increases. That's why most countries' central banks have an inflation target of between 2% and 2.5%.

In the UK the target is 2%, with the figure for the preferred measure at 1.7% in September. This is the lowest rate seen since late 2016.

And here wages have been rising at a faster rate than inflation since March 2018.


How is it measured?


- the Consumer Prices Index (CPI) - Most common of them all

- the Consumer Prices Index including owner-occupiers' housing costs (CPIH)

- the Retail Prices Index (RPI)


In recent studies here's a few of the most common things consumers spend their most money on - cinema tickets, bicycles, and even smart-speakers.
















So, fuel can affect the inflation rate more than the price of stamps, for example.

CPIH is the ONS's preferred measure. It builds on CPI to include various costs associated with living in your own home, such as council tax.


RPI, a measure that has fallen out of favour with economists, includes some housing costs but doesn't account for some people switching to cheaper products when prices rise.

The July figure is the measure used to decide how much some train fares increase by each year. At 2.8%, it was above the 2.1% inflation rate for the more widely used CPI that month. Passenger groups want a change in the way ticket prices are calculated, as RPI is no longer a national statistic.


What is it used for?


Inflation is one key factor the Bank of England considers when setting the "base rate".

The charge to borrow money or what you pay on for your savings is influenced by what interest rates banks can charge.


If it thinks inflation is likely to be below 2%, it may cut interest rates to lower the cost of borrowing and therefore encourage spending.


Inflation also has a direct impact on some people's incomes.


State benefits and many occupational pensions rise in line with CPI. The basic state pension is currently governed by the so-called triple-lock - rising by the highest of CPI, average earnings or 2.5%.

As well as the cost of some train tickets, repayments on student loans and bonds issued by government are also pegged to RPI.


So as you can see inflation affects people from all walks of life, whether you save money or borrow money. What's important is you need to understand it.


Thanks,

Yourspace Team.


Source: https://www.bbc.co.uk/news/business-12196322

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