This morning the inflation figures were released for September. They show that the economy is in ongoing deflation, as it has been since March 2009, with the annual change in the Retail Prices Index (RPI) standing at -1.4 percent. At the same time, the policy index used by the Bank of England to determine its interest rate and quantitative easing policies – the Consumer Prices Index (CPI) – saw its annual rate of inflation fall to 1.1 percent from 1.6 percent.
Some press commentary suggests that the fall in CPI inflation to 1.1 percent suggests there is now a threat of outright deflation next year. This is wrong. The country is already in deflation. The CPI is not a measure of the cost of living in the UK. In particular, about a quarter of the goods and services covered by the Retail Prices Index are simply excluded from CPI.
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