An abstract is required. (Davies, 2012). The Inflation is stated as a percentage. For example if the CPI is 2%, it means that we now have to spend 2% more on the same goods and services than we were doing earlier. Consider the price of a Cinema Ticket. Suppose it was £10 last year and the CPI is 2%, this means we will now have to expend £10.2 for the tickets this year. (2% increase in price) (Davies, 2012)
CPI measures the changes in prices for Consumer goods and services only, whereas RPI includes mortgage costs taxes and interest payments. CPI accounts for consumer choice as well. It formulates that with a change in price, a consumer shall move to a cheaper alternative or go for a substitute product. For example, if the price of Tea increases too much for the liking of a consumer, he may opt to consume Coffee if it is available within his price range. The Government and Bank of England use CPI and RPI to fix interest rates, if inflation is expected to rise beyond a certain level, the Government may increase interest rates in order to curb inflation.
The Office of National Statistics (ONS) collects several prices of goods and services. It weighs how much we spend on the relative products every month and then these prices are combined to produce a composite index which is the Rate of Inflation.
The Inflation in UK in January 2014 was recorded at 1.9%, with the average Inflation between 1989 till January 2014 being 2.8%. It recorded a High of 8.5% in April 1991 and a low of 0.5% in May 2000. (Taborda, 2104)
The following table represents the history of Inflation in UK over the past decade. As we can see from this table, the highest Rate of Inflation was recorded in Sept. 2011 and Sept. 2008 at 5.2%, and the lowest at 1.1% in Oct. 2009 and March April Oct. of 2004.
As we can see from the 2 graphs, controlled inflation is good for the economy. The BOE has set the benchmark for controlled inflation at 2%.