UK’s inflation rate is 0% or 3.2%?

Even if the specialists have reported the inflation rate in the UK to have decreased to 0% last week, many people are confused: why are things getting more expensive? 

Using simple calculation of a Retail Price Index, or more to the point, the Consumer Price Index, ((Pi – Po)/Po)) x 100, where Po is the price of the basket a year ago, and Pi is the price of that basket now, the real inflation rate can be calculated, says the Register. Although, economists, of course would argue that "real inflation" is not just that.

Today government bandies about two different statistical measures – Consumer Price Index (CPI) and Retail Price Index (RPI) – to calculate inflation. Consequently, while CPI is currently 3.2%, RPI is 0%.

It should also be said that an average shopping basket, representing expenditure of an average Brit in a month, used by the Office of National Statistics (ONS) Categories varies from necessities: food, utilities and cost of accommodation; to discretionary purchases: entertainment, holidays and electronic goods. Moreover, the ONS constantly carries out a massive monthly sampling process to track movements in each item and category, and applies a weighting process to consider prices changes of which products have larger effect on the indices than prices of others. As a result, some items appear or disappear from the shopping baskets over time.

Due to CPI being much newer, and the fact that it is calculated as a geometric mean, rather than a simple arithmetic mean, it should be a more accurate reflection of changes in consumer expenditure than the RPI. However, the fact that it is currently much higher than RPI is a reflection of the recent dramatic falls in interest rates. Naturally, people who had a high mortgage and large (variable rate) loans are now feeling much richer. For others prices really are going up. Nonetheless, it should be remembered that ONS provides its own personal inflation calculator.