5.2 Impact of inflation

What is inflation?

A general rise in the price of goods and services that affects the purchasing power of money because £100 in one year’s time buys less than £100 buy today

Why do savers need to earn an AER that is the same as the rate of inflation?

To maintain the purchasing power of their money

If the AER is higher than inflation, what will happen to the real value of their savings?

Will grow because its purchasing power is increasing

What is the Bank of England tasked with?

Managing inflation to meet the government’s target of 2%

What are the two indices used to measure inflation?

• The Consumers Prices Index (CPI)

• The Retail Prices Index (RPI)

What is the CPI used to measure?

The inflation rate managed and quoted by the Bank of England

How do both the CPI and RPI measure inflation?

By calculating the average change in prices of basket of goods over a 12 month period

What is the basket of good used as the basis of the CPI or RPI made up of?

Around 700 consumer goods and services that represent the spending patterns of UK households

What is used to compile the indices?

Around 180,000 separate price quotations every month from 150 areas of the country

The prices are then weighted according to what?

The pattern of UK household spending

How does the basket reflect current spending preferences?

By regularly removing or adding goods and services

What is the main difference between CPI and RPI?

RPI includes mortgage interest payments and other owner-occupier costs, while CPI does not

Show a comparison in the average private rent cost per week over time

Averaged £153 per week in 2008-2009 compared with £201 per week in 2019-2020

Show a comparison on the average annual domestic electricity bill over time time

The average annual domestic electricity bill rose from £539 in 2010 to £696 in 2020