Five things you didn't know about inflation

The Bank of England released its latest inflation figures yesterday - but how much do you really know about price inflation?

by Emma Haslett
Last Updated: 09 Oct 2013

1. The government does have some control

Although the government tries to influence inflation through measures interest rates, George Osborne has taken more direct action. When Osborne was installed as chancellor, one of his first actions was to change the standard measure for inflation (which informs, for example, pension). He swapped it from the Retail Prices Index to the Consumer Prices Index – which is almost always the lower of the two, partly because it doesn't include housing costs. The decision saved the Treasury billions in pension payouts – although pensioners themselves lost out.

2. Inflation targeting is fairly new

Most economies now use inflation targeting, but a target for inflation was first adopted in New Zealand in 1989, and in the UK in 1992. A low inflation target (in the UK and the US it’s 2%, in China it’s 4%) is seen as a good way to keep growth at a steady rate – although some economists challenge that wisdom.

3. Inflation isn’t all bad

It’s been 45 consecutive months since inflation was over 2%, so the fact that people see rising prices as a bad thing is understandable. But if prices stagnated – or even started to fall - money might be worth more rather than less. Thent if a business took out a loan, the money it pays back to its creditors has greater buying power than the cash it originally borrowed. That would affect business’ abilities to take out loans – cue vast amounts of layoffs and insolvencies.

4. Inflation does not necessarily equal a rising cost of living

Inflation is calculated across an entire basket of goods. This month, it was pushed up by the rising price of air fares – although the price of clothing dropped. If you don’t fly much, but buy a lot of clothes, your cost of living is unlikely to have risen. If, on the other hand, you’re a travel addict who wears clothes until they’re nothing more than tattered rags – bad luck.

5. The changing basket of goods

Inflation is measured based on a fictional ‘basket of goods’ – typical acquisitions – the Office for National Statistics decides on every two years. Here are some historical changes:

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