Surprise Inflation Fall
Published / Last Updated on 18/08/2021
Figures released today by the Office for National Statistics (ONS) show the yearly Consumer Price Index (CPI) inflation has fallen from 2.5% pa to 2.0% pa in July.
The fall is put down to a short term blip in falls in costs on recreational spend, as we all return to work and clothing but the costs of fuel rising have underpinned the rate of price increases at 2.0%pa.
Interestingly, the old measure of inflation, the Retail Prices Index (RPI) only fell from 3.9% pa to 3.8% pa.
The difference between RPI and CPI inflation is that RPI is a straight line average price across a select baskets of goods and services ie, the price of goods and services are simply added up and divided by the number of items.
CPI is a geometric mean. Rather simply adding and dividing for an average price, CPI is where each price for good or service is multiplied together and then the nth root of the same number of goods is applied. E.g. the square root of £10 X £2 or the cubed route £10 X £2 X £6. The nth root of ‘n’ number of item prices multiplied.
Comment
The RPI figure with an arithmetic mean rather than a geometric mean is we believe a more accurate measure given that is a real average increase of goods and services that we buy rather than an average of an average i.e. geometric mean which means some goods that are less expensive but perhaps we don’t buy as often drag the geometric CPI result down.
Firstly, inflation is only back to where it was 2 months ago. Make no mistake, many commentators including ourselves and the Bank of England expect CPI inflation to rise to c4.0% pa by the end of the year. We are already planning for the same within client investment and pension portfolios and if you are not, you should consider planning for the same.