UK inflation hits 17-month high and what savers can do about it

UK inflation accelerated again in April to hit its highest rate in 17 months, official figures show.

On the Consumer Prices Index (CPI) measure, inflation hit 3.7% - well above the target of 2% and the highest rate since November 2008.

On the Retail Prices Index (RPI) measure, which includes housing costs, inflation was up to 5.3% - its highest rate in 19 years.

The RPI measure is commonly used to decide pay rises or pension payments.

Bank of England governor Mervyn King has written a letter of explanation to the new Chancellor, George Osborne, as the official CPI measure remains more than one percentage point above the 2% target.

Earlier this month, Mr King said he expected inflation to be higher in the coming months than previously forecast, but insisted that it would slow to below the 2% target before the end of the year.

In his letter, the governor said inflation had accelerated significantly since September last year.

He blamed rising fuel prices, the rise in VAT and the fall in the value of the pound for the rising trend.

But he warned that these temporary factors were "masking the downward pressure on inflation from the substantial margin of spare capacity in the economy".

"If the recovery continues as expected, that will gradually erode the slack in the economy, bringing inflation back to target," Mr King added. (source BBC news - click here for full story)

Despite this news the Money to the Masses 'Interest rate clock' will remain unchanged for now. Although the figures were above analyst expectations (they always are) it is widely accepted that inflation will indeed increase in the short term, hopefully falling away at the end of the year and into 2011.

For those of you wondering what the difference is between CPI and RPI below is an excerpt from a previous post of mine. (Also, I suggest that savers read my post Money tip #30 – One way to protect your savings from inflation, both tax and risk free) :

But what does this all mean? And what’s the difference between CPI and RPI?

Both the CPI and RPI are attempts to estimate inflation in the UK. The RPI measure is arguably the better known in the UK. Sometimes referred to as the “headline” rate of inflation, it is the rate often cited by unions as a benchmark for agreeing pay settlements. It is also the basis for pension increase and National Savings Index linked investments

The CPI measure is the rate the government’s inflation target is based on. It is an internationally comparable measure of inflation

Both indexes analyse the prices changes of a range of goods and services over time (referred to as the ‘basket’). Some of the goods and services will carry a higher weighting within the indexes, reflecting the fact that we spend more on some items than others. In addition, the actual items which are included in the basket are reviewed each year and are subject to change.

So why do the CPI and RPI values differ?

The answer is that the two measures cover different items. For example, the CPI does not include Council Tax, mortgage interest payments and some other housing costs. The CPI measure also includes some items such as charges for financial services which are not in the RPI. Another difference is that the CPI measure covers a broader sample of the population in its calculations than RPI.

There is also a difference in the mathematics of each index which means that the CPI is always lower than RPI for a given data sample.