Wednesday Jun 21 2023 05:00
4 min
The CPI is the Consumer Price Index. It’s one of the key ways we measure domestic inflation in the UK. (Other nations such as the USA have their own domestic CPI.)
The UK government actively uses the CPI as their basis for working out inflation targets, as well as using it to help inform their policies on things like state pensions and benefits.
The CPI measures the average change in how much goods or services cost, on a month-to-month basis.
Here’s how the process works:
They then release the new figures in a monthly announcement, showing how the average pricing has changed over the past month.
(The CPI will also usually release quarterly and yearly comparisons, too.)
Which 700 goods and services are measured changes over time to match the general buying habits of the British public.
An example of this would be in March 2023, when electric bikes were added to the list of included goods for the first time.
Inflation is a key economic factor for policy makers in the government and in central banks.
Indirectly, then, the CPI can have an impact on things like your pension and any benefits you might want to claim.
If the CPI increases, interest rate rises can follow. Higher interest rate rises are a fairly standard economic policy move to combat inflation.
Hopefully that makes it clear why banks, credit institutions and the like tend to raise interest rates on variable interest products like credit cards and mortgages.
It’s so they don’t lose money in real terms when inflation is high.
The problem with this policy is that increasing interest rates makes it likely more people will default on their debt if it suddenly increases.
So, balancing interest rates and inflation is a constant balancing act, which the CPI can assist policymakers with.
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