Inflation: a guide.

What actually is inflation? Inflation is the rate of change of prices for commodities and services. There are a number of different measures of inflation in use. The most commonly used and most significant ones are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Each looks at the prices of hundreds of things we commonly spend money on, including bread, theatre tickets and a pint at our local – and monitor how these prices have changed over time.

One of the main differences between the two main indexes is that RPI includes housing costs such as mortgage interest payments and council tax, whereas CPI does not. The inflation rates are expressed as percentages. If CPI is 3%, this means that on average, the price of products and services we buy is 3% higher than a year earlier.

So what’s the big deal? Currently inflation is at around 3.7%, it’s highest level since April 2010. This is partly due to rising energy costs and to prices of food spiralling upwards. The Bank of England (BoE) has set a target of 2% and hopes to do so for 2012; but we are already close to double that targeted figure.

Economists have predicted no infantry change, but as the market is not a precise science there are many variables. Petrol and fuel have skyrocketed in cost, food is at an all time high, rising 1% in a month! This is the largest rate rise ever recorded and is double the norm. And as the public sector are set to take massive cuts, no one knows what’s next in store.

The bank’s monetary policy committee claims they are not going to move on this front just yet, claiming that the sudden elevation in inflation is due to a rise in VAT plus rising fuel and food prices. The MPC claim that this is a temporary rise, but it looks unlikely that food and oil prices are suddenly likely to drop, especially in the face of an ever growing world population. The EU are sitting pretty on inflation at 2.3%, this may leave the Bank of England feeling slightly uncomfortable to say the least.

Retail Prices Index (RPI) inflation – which includes mortgage interest payments – rose to 4.8% from 4.7%. Raising rates at a time when fiscal policy is being tightened, while businesses and individuals are facing greater pressures, would be a mistake and should be avoided,

An interest rate rise to 1.5% would add 87 to monthly repayments on a typical 150,000 mortgage – an extra 1,044 a year. This would be a bonus for Britain’s multitude of savers, who really lost out when interest rates dropped to a historical low of 0.5% back in March 2009.

But the level of household debt is so high – around 160% of income. A rise in interest rates will create a significant squeeze on family finances and could potentially spiral the recovery into freefall.

The problem is, the public will be forced to swallow a lot of unsavoury news in the meantime and will need someone to blame. The Bank of England may be feeling somewhat deflated right now. Perhaps a sensible option would be for the Bank of England to revise its forecast of inflation rising to 2% up to 4%, thus reducing the pressure to elevate interest rates…

When the time does come to sell your home, make sure you consult a trusted conveyancing solicitor for all the advice you need.