Inflation
Inflation is a measure of the increase in the prices of goods and services over time and therefore the rise in the general cost of living.
The Government Statistical Service measures inflation through the Retail Prices Index (RPI). It is based on the monthly monitoring of a “basket” of goods and services purchased by a typical family in different parts of the UK.
Items included cover food, household goods, mortgage payments, rents, and fuel etc.
The headline rate is the figure most often quoted known as RPI or Retail Price Index. The underlying rate excludes the influence of mortgage rates and payments and is known as (RPIX) A purer version of the underlying rate which also excludes taxation is favoured by the Bank of England and is known as (RPIY).
To calculate the percentage change over a period of time use this formula:
Current RPI – Previous RPI x 100 / Previous RPI
Example: Rental amount on entry, July 1994 – £10500, what would be the current rental value if this was to rise in-line with the RPI?
RPI July 94 (144.0), RPI April 01 (173.1)
173.1-144.0 = 29.1 X 100 = 2910 / 144.0 = 20.2%
In this period retail prices have risen by 20.2%,
£10500 x 1+20.2/100 = 10500X 1.202 = £12621
The UK Retail Price Index – compiled from various sources and standardised from 1915 to the present is accessible at: www.wolfbane.com/rpi.htm
The table below shows how the value of £100 decreases over time due to the effects of inflation:
| Years | 2% | 4% | 6% | 8% | 10% |
|---|---|---|---|---|---|
| 5 | 90.60 | 82.20 | 74.70 | 68.10 | 62.10 |
| 10 | 82 | 67.60 | 55.80 | 46.30 | 38.60 |
| 15 | 74.30 | 55.50 | 41.70 | 31.50 | 23.90 |
| 20 | 67.30 | 45.60 | 31.20 | 21.50 | 14.90 |
| 25 | 61 | 37.50 | 23.30 | 14.60 | 9.20 |
| 30 | 55.20 | 30.80 | 17.40 | 9.90 | 5.70 |
| 35 | 50 | 25.30 | 13 | 6.80 | 3.60 |
| 40 | 45.30 | 20.80 | 9.70 | 4.60 | 2.20 |
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When you consider that inflation reached around 24% in the UK during the 1970s, this is a major factor when comparing investments.