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What is you're inflation yardstick?

14 September 2017

Inflation was in the news last month in various guises.

August was a month when inflation hit the headlines several times trailing a cloud of acronyms:

  • The Bank of England Quarterly Inflation Report (QIR) revealed that the Bank now expects inflation (as measured by the Consumer Prices Index – CPI) “to peak around 3% in October”. The Bank expects inflation will still be above its 2% central target by the end of the first quarter of 2020. This forecast assumes that interest rates will rise by 0.5% over the period, in line with market expectations. The Bank is relatively unconcerned about missing its target, saying that the overshoot “reflects entirely the effects of the referendum-related fall in sterling”.
  • Shortly before the QIR was published, news emerged that CPIH, the inflation measure favoured by the Office for National Statistics (ONS), had been approved as a National Statistic by the Office for Statistics Regulation. CPIH is a variant of the more widely quoted CPI, the “H” being shorthand for the addition of owner occupiers’ housing costs (including council tax). CPIH could ultimately replace both the CPI and the now discredited RPI. The ONS view of the RPI is that it “is a flawed measure of inflation with serious shortcomings and we do not recommend its use.”
  • On 12th September, the ONS issued inflation statistics for August, showing CPI running at 2.9% and CPIH running at 2.7%, with RPI higher than both at 3.9%. The July RPI of 3.6% is still an important number, because it sets the basis for next year’s rail fare increases (although the government could change its mind and choose something below 3.6%).
  • The government uses RPI to ratchet up revenue – evidence for this can be seen following the publishing of last month’s inflation data. The Student Loans Company confirmed that from 1 September the minimum interest rate for English and Welsh student loans started within the last five years will be based on the March 2017 RPI (3.1%), with a maximum addition of up to 3% taking the overall interest rate up to a ceiling of 6.1%.

Whatever your chosen yardstick for inflation, it is important not to forget its impact on your financial planning. At the July 2.6% CPI/CPIH rate, the buying power of £1 was calculated as being little more than 75p in 12 years’ time. Use the RPI figure and the same result arrives after just eight years. The latest inflation figures will have done nothing to improve on this outlook.

What next?

If you would like to discuss your own financial circumstances, speak to your Chase de Vere adviser, call us on 0345 300 6256 or complete this form for a call back.