Figures released today, February 14, 2012, appear to show a fall in the rate of UK inflation but do they? Well in terms of how such things are calculated the answer is yes. In real terms the answer is no.
The problem is that the way inflation rates are calculated can be deceiving. Last year when the government set the rate of VAT higher it helped to send inflation spiraling upwards. VAT stands for value added tax and when it was increased to a massive 20% many goods and services became much more expensive. It is still 20%.
The increase in VAT, added to increases such as those for gas and electricity, caused the rate on inflation to increase and keep increasing. The latest figures do not include these rises from last year. That makes sense of course. However none of the goods, taxes, services and the like which had increased have now decreased in price.
It is good news that the rate of inflation is slowing down. In the last year at times it seemed as if every time you bought a product in the UK it had gone up in price. However even though these increases are slowing down they are not reversing.
There there are wages and salaries. In general salaries have been frozen. Any pay rises will not keep pace with inflation. This means that in real terms products effectively cost much more.
The BBC has reported that, "The Consumer Prices Index (CPI) measure of inflation fell to 3.6% in January, down from 4.2% in December, according to the Office for National Statistics. Retail Prices Index (RPI) inflation - including mortgage interest payments - fell to 3.9% from 4.8%." ONS, the Office of National Statistics has shown UK pay rising at a paltry 1.9% but for many workers it was far less.
This still means that prices are increasing and outstripping salaries. It may be good news that the rates have fell slightly but we are far from out of the woods yet. The government, in many ways, want people to spend and boost the economy. With inflation still at this level, unemployment increasing and many salaries frozen the best advice is to still be a cautious spender.