The Bank of England Monetary Policy Committee met 18th September and kept interest rates unchanged at 5%. The committee (MPC) voted by a majority to keep rates at 5% rather than a further reduction in borrowing costs.
The main reason for the hold was that inflation has stubbornly remained above the target level of 2% currently at 2.2%, with inflationary pressures remaining in the economy and an expectation that inflation could rise further later in the year.
What is inflation
Unlike Donald Trump we do not measure inflation by the size of a tictac container. Inflation is the rate of increase in prices over a given period of time. It is measured in different countries in different ways, but in the UK the main two measures are:
The Retail Price Index RPI
The Consumer Price Index CPI
RPI measures a basket of up to 700,000 goods and services, but was replaced by CPI in 2003 as the statistical measure of inflation in the U.K.
CPI was introduced in 1996 and measures the change in prices UK consumers pay for everyday goods and services, like groceries, fuel and clothing. Both are calculated and recorded by the Office for National Statistics.
Any rise in inflation is “embedded” into prices, so an inflation rise of say 10% that then subsequently reduces to an inflation rise of 2% does not mean that prices have reduced, only that the rate of increase has slowed. The 10% rise in inflation means that the price rise is embedded into the future prices. For prices to fall there needs to be “negative” inflation, which is very rare. That is not to say that prices for individual goods and services do not ever fall, because prices for individual items may fall in the future. But overall inflation is a measure of the increase or decrease in the prices of a basket of goods and services rather than a measure of individual prices.
The causes of a rise in inflation can be very complex, but in general a rise can be because the demand for goods and services outstrips the supply, or the cost of the manufacture or provision of goods and services increases.
The generally accepted rate of inflation of a “healthy” western economy is 2%. This is the rate most Central Banks use as their “target” rate for inflation.
