Wednesday 23rd July 2008
Inflation is calculated across a number of indices, each of which take different elements into account when coming up with a final figure.
The index which most commonly hits the headlines in the UK is the consumer prices index, or CPI - this is the figure given by the Bank of England on the main page of its website and gives a general idea of how quickly the cost of living is rising.
Another value sometimes given is RPI, the retail prices index, which is similar to CPI but based on different goods and services and aims to cover different households.
For each method, the Bank has a theoretical shopping basket consisting of items a typical household needs to buy regularly, as well as some larger high-value goods which are only bought once in a while.
In a healthy economy, the Bank aims for a target of two per cent inflation based on the CPI methodology, but in July 2008 the value reached 3.8 per cent, almost twice its intended level.
What's more, some industry commentators have warned that different demographic groups are facing even higher inflation in real terms - and that we all may actually be experiencing a faster growth in our cost of living than is reported.
Should we be worried?
Richard Moore, manager of the Santander UK growth fund, claims that inflation is now a greater threat to Britons than the credit crunch.
He explains that, driven in part by global oil prices, inflation is now the single greatest factor influencing the UK's stock market.
This is likely to materialise through "hawkish" policy-setting from the Bank of England and reduced profits for corporations, the economist adds.
But while inflation remains high, he concludes that it is unlikely that such tightened conditions are to ease.
Meanwhile, research by Abbey Mortgages - part of the Santander group - has found that 86 per cent of consumers are tackling their personal exposure to inflation.
Some 84 per cent are doing so by cutting back on non-essential spending and focusing on their main bills.
Nearly half (44 per cent) are taking the other approach of raising additional money from second jobs or other sources in order to support a more expensive lifestyle.
Who has it the worst?
Generally speaking, it seems that the real-terms rate of inflation faced by consumers depends on which products they are likely to buy most often.
The Alliance Trust Research Centre notes that this places the elderly in a high-risk category.
Over-75s spend 16 per cent of their income on food, compared with nine per cent in households aged under 30, the organisation observes.
With food prices up by 11 per cent over the past year, the elderly may therefore be more exposed to inflation.
Even within the food category, such people spend more on dairy and fats, which have increased by 19 and 28 per cent in price respectively.
Shona Dobbie, head of the Alliance Trust Research Centre, comments: "Headline inflation is likely to rise a bit further in the next few months.
"The danger is that this high level of inflation forces policy makers to leave interest rates higher for longer, increasing the risk of an even greater slowdown in demand and threatening the economy as a whole."
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