What 0% inflation actually means for you

The Consumer Price Index (CPI) bumped down at 0% in February – but what exactly does that mean for you and your money? Here’s a quick primer…



What is CPI and what does it measure?

We use CPI to talk about how high or low inflation is.

Inflation basically shows the general increases (or decreases) in the value of our money, based on the prices of the everyday things we all buy.

What we buy is measured by taking a hypothetical ‘shopping basket’ of the most popular items of the year and adding up their typical prices. The total is then compared to last year’s basket to give us a plus or minus percentage change.

As CPI hit 0% in February, it means prices weren’t any higher or lower than in February 2014. Essentially, prices didn’t inflate or deflate.

What’s the target CPI?

The government would like CPI to be 2%. If the target is missed by 1% or more either side, the Governor of the Bank of England has to write to the Chancellor to explain.

What was CPI in January?

In January this year, CPI was at 0.3%. February represents the fifth consecutive fall in CPI, and was lower than the 0.1% predicted by analysts.

Why is it so low?

As CPI measures the prices of the things in the basket, a fall in CPI means the prices of the things we typically buy is falling.

We’ve seen petrol prices fall quite sharply so far this year. The cost of food, energy and computer goods has also gone down, and all contributed to lower CPI in February.

At 0%, inflation is now at its lowest since records began.

What does it mean for your pocket?

Low inflation will generally make you feel better off because when things cost less, your money goes further at the supermarket checkout, or petrol pumps.  When your money goes further, it might also help you pay down personal debts faster.

If you’re a saver, you need inflation to be lower than the (taxable) return on your savings to actually grow your money – which at a CPI of 0%, isn’t going to be difficult.

Of course inflation is ever changing. Just five years ago, in February 2010, CPI was 3%, which meant that the value of our money was quite a bit lower.

If you’re thinking of making a big financial commitment now, while you potentially have a bit more disposable income – let’s say buying a house – then you should think about how you’d manage if inflation went up, and your money’s buying power went down.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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