This means CPI inflation has increased at a faster than expected rate, from 4% in the year to the previous month.

The rate of increase of the Retail Prices Index (RPI) measure of price inflation came down, from 5.3% in March to 5.2% for the year to April.

These changes close the gap between CPI and RPI considerably.

The biggest factors driving the growth of price inflation between March and April were air transport, alcohol and tobacco, and gas.

There were also downward pressures on price inflation, coming from petrol and diesel costs, miscellaneous goods and services, clothing and footwear, and communications.

It is worth noting that the timing of Easter had a big impact on the inflation figures.

In particular, it had a significant influence on certain travel costs. This is because prices for air travel are collected for the inflation figures at various times before the departure date.

Compared to last year, when Easter Sunday fell on 4th April, the figures for air travel were included in the data set this year. This potentially means that the contribution of travel costs to the inflation figures this month give a slightly misleading result for inflation over the course of twelve months.

However, it is also worth noting that core inflation has now reached the highest level since records began in 1997. Core inflation currently stands at 3.7% and is a measure of inflation which excludes certain items subject to volatile price movements, such as food and energy.

What does all of this mean for interest rates and for investors?

Whilst this monthly increase in price inflation is higher than was expected, a single month of inflation figures is unlikely to force policy makers at the Bank of England into rising interest rates suddenly.

The Monetary Policy Committee (MPC) is likely to stick to its long-term view of inflation, which suggests interest rates will remain low so as not to risk damaging fragile economic recovery in the UK. The real test for inflation and monetary policy will come along early next year when the January 2011 VAT increase falls out of the calculation.

With commodity prices incredibly volatile at the moment, inflation is likely to remain volatile as well.

Investors need to consider how they position their portfolios against a backdrop of stubbornly high price inflation and low interest rates, which have the prospect of rising in the future.

Exposing money to asset-backed investments, such as company shares and property, is likely to deliver the best returns in this economic environment, although this strategy is not without risks which must be carefully managed.

Photo credit: Flickr/BethinAZ

The Retail Prices Index (RPI) measure of price inflation also fell in the twelve months to February 2011, from 5.5% to 5.3%.

Both measures of price inflation fell due to a record monthly fall in the price of food and non-alcoholic drinks. Prices for these items fell by 1.4% over the past two months, compared with a 0.3% rise in the same period of time last year.

These latest price inflation figures are published on the same morning as British Retail Consortium (BRC) confirmed the worst monthly fall in retail sales since records began in 1996.

Total retail sales in March were 1.9% lower than those a year ago, although the early timing of Easter in 2010 has influenced these figures to some extent.

News that price inflation has fallen back slightly and retail sales are suffering is likely to delay an interest rate rise.

Whilst the CPI measure of price inflation now stands at double the level of the 2% government target, the Bank has been arguing for months that core inflation remains at a manageable level, with stubbornly high inflation the result of temporary and imported measures which would not be controlled by higher interest rates.

It is too early to know whether the Bank has made the right calls with reference to inflation and economic recovery. Only hindsight will eventually confirm the sense in their rate and QE decisions.

What higher interest rates now would achieve is a major blow to consumer confidence and spending. With the UK economy remaining in a fragile state of recovery, it seems unlikely that the Bank would be willing to risk pushing up interest rates in the near certainty that this would have little impact on price inflation anyway.

Savers continue to face difficult decisions about managing their savings in a lower interest rate and higher price inflation environment, where keeping money in cash will result in the erosion of the real value of the money.

Photo credit: Flickr/Rob Gallop

In the future, the Treasury will be using the Consumer Prices Index (CPI) measure of price inflation to calculate changes to most allowances and thresholds.

This will replace the current use of the Retail Prices Index (RPI). CPI tends to be a lower amount than RPI, so in practice this change will mean allowances are increased by less in the future.

There are a few examples of how this will work in practice.

The Individual Savings Account (ISA) annual allowance is currently £10,200 for the 2010/11 tax year. On 6th April 2011, the ISA allowance will increase to £10,680.

This increase was based on the RPI figure for the year to September 2010, rounded up so the annual allowance remained easily divisible by twelve (to make monthly investments easier to administer).

For the 2012/13 tax year onwards, the ISA allowance will be based on CPI inflation for the year to the previous September, so CPI for the year to September 2011 for the 2012/13 ISA allowance.

This change in indexation will also apply to the capital gains tax annual exempt amount. This is currently £10,100 for the 2010/11 tax year and becomes £10,600 on 6th April 2011 for 2011/12.

This annual exempt amount will also be calculated for future tax years based on CPI rather than RPI for the year to the previous September, rounded up to the nearest £100 in this case.

There are some exceptions to these indexation changes.

For the remainder of this parliament, the yearly increases to employer National Insurance thresholds and age related personal allowances are going to increase in line with RPI.

These subtle but important changes are important to understand so they can be incorporated with your Financial Planning for the future.

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The Office for National Statistics (ONS) has announced a series of changes to the items used in this inflation ‘basket’, to better reflect the type of things on which we collectively spend our money.

The inflation basket contains 650 individual goods and services, with the ONS collating 180,000 price quotations from 150 areas of the UK each month to determine the level of price inflation. This is then reported using the Retail Prices Index (RPI) or Consumer Prices Index (CPI).

Leaving the inflation basket following this review are mobile phone downloads, vending machine cigarettes, rose bushes, pork shoulder, vet fees for spaying a kitten and hardboard.

The new items added to the inflation basket are smartphone handsets and their apps, dating agency fees, hair conditioner, oven-ready joint, dried fruit, sparkling wine, medium-density fibreboard (MDF) and craft kits.

The inflation basket is created by using a £400m a year threshold on expenditure for an item. Goods or services where we spend at least this amount each year are typically included within the basket, unless they are adequately represented by other goods or services in the basket.

Where the amount spent on an item falls below £100m a year, the ONS has to have a good reason for continuing to include it within the inflation basket.

It is useful to understand how the ONS arrives at inflation figures because they are average figures.

The level of price inflation we each experience as individuals will differ depending on how we choose to spend our money. For this reason, older people typically experience higher price inflation due to the nature of their expenditure on goods and services which tend to escalate in price more rapidly.

Photo credit: Flickr/Sir Mildred Pierce

CPI has risen from 3.7% in December to 4% in January.

The Retail Prices Index (RPI) measure of price inflation, which includes mortgage and housing costs, has risen from 4.8% to 5.1%.

Both measures of price inflation were pushed up largely by the increase in the standard rate of Value Added Tax (VAT) to 20% and the continued increase in the price of crude oil.

Inflation has now been above the government target of 2% by at least 1% for more than 14 months.

Bank of England governor Mervyn King will have to write another letter to the government explaining why inflation is above their target by more than 1%.

These latest inflation figures are bound to prompt further calls for an interest rate rise, although we maintain our belief that this would be the wrong course of action for the Bank of England to take at this time.

Price inflation in the UK is being pushed higher mainly as a result of temporary influences (higher VAT) and imported inflation (commodity prices). Increasing the domestic rate of interest would have no impact on these two factors but it would dent consumer spending ability and confidence, possibly damaging economic recovery.

It is never going to be comfortable for policy makers to watch inflation go higher and take no action in terms of interest rates.

It is worth remembering that the Monetary Policy Committee (MPC) had this latest price inflation data when they made their decision to hold interest rates at 0.5% last Thursday. What will be really interesting to see now is the balance of votes within the MPC and if opinions are starting to shift towards a rate rise.

We will be keeping a close eye out for the Bank of England quarterly inflation report on Wednesday and retail sales figures on Friday to look for any further clues about the future direction of monetary policy.

This is compared to a rate of 3.3% for the year to November.

There was a more modest rise in the Retail Prices Index (RPI), from 4.7% to 4.8%. RPI includes mortgage and housing costs.

We expect price inflation to peak at a slightly higher level than this over the next few months, as the VAT rise from the start of this month feeds into the system.

Higher fuel prices will also push up inflation in the short term.

However, we share the view of the Bank of England that inflation will start to fall after this as spare capacity in the economy starts to bring down prices. For this reason, we maintain our belief that the Bank will not start to raise interest rates just yet in order to bring this temporary rise in inflation under control.

This is little comfort for savers, who are experiencing capital erosion due to the combination of historically low interest rates and higher than target price inflation.

The average interest rate available on an instant access savings account is 0.23%, so savers with this rate of interest have seen capital erosion of 4.57% over the past year, using the RPI measure of price inflation.

Capital erosion is even more severe once income tax on savings interest is taken into account.

Savers face a tough choice this year – whether to stay with the relative security of cash savings but experience further capital erosion due to inflation, or expose some of their capital to risk with the aim of achieving ‘real’ returns over the medium to long term.

It’s a difficult decision to make and we would encourage anyone who faces this dilemma to seek professional independent financial advice from an adviser who is not financially motivated to invest your cash savings, but can consider cash on equal terms with other investment options.

Do speak to us if you need impartial advice on this or any other investment-related matter.

Economists and analysts had expected the figure to remain unchanged this month, at 3.1%. Prices have gone up as a result of higher fuel prices.

The Retail Prices Index (RPI), a different measure of price inflation which includes mortgage and housing costs, fell slightly for the year to October. RPI was 4.5%, down from 4.6% the previous month.

Contained within these inflation figures is a slowing down of food price inflation.

Because CPI remains more than 1% above the government target of 2%, the Bank of England governor Mervyn King had to write another letter to the Chancellor, George Osborne.

In this letter, King points to “a number of temporary influences,”. The Bank is also looking ahead to the VAT rise from 17.5% to 20% in January, as this will temporarily push up price inflation when it is introduced to the system.

This marginal change in both measures of price inflation should change very little in terms of monetary policy or the prospect for interest rate increases.

The outlook for inflation remains uncertain, although the Bank appears to be backing the view that spare capacity in the economy will drive down price inflation over the longer term.

The Retail Prices Index (RPI) measure of price inflation, which includes housing and mortgage costs, fell slightly from 4.7% to 4.6% for the year to to September 2010.

Inflation figures published in September are particularly important as a range of benefit and allowance increases are usually linked to these numbers.

The annual Individual Savings Account (ISA) allowance for 2011/12 is due to be linked to the increase in RPI. This should see the allowance increasing from £10,200 to £10,680 – an increase of £480.

It should get rounded up slightly to ensure it can be easily divided by 120, and therefore monthly ISA contributions will be a whole number.

This will mean that investors can put up to £5,340 into a cash ISA in the next tax year, and the balance of their unused allowance up to £10,680 into a stocks and shares (investment ISA). We await confirmation from HM Treasury that the ISA allowance will actually be extended.

The publication of the latest inflation figures included details of a rise in the prices of clothing and footwear. This was attributed to discounted summer fashion ranges giving way in the shops to more expensive new autumn ranges.

The CPI measure of inflation has remained above the government target of 2% for ten months now. A sustained higher level of price inflation is not expected to prompt the Bank of England to increase interest rates, not yet anyway.

In fact, the Monetary Policy Committee (MPC) needs to balance economic recovery with controlling inflationary pressures in the economy.

We feel that they are unlikely to risk tipping the UK back into recession with a rate hike to control inflation, particularly when the prospect of a further round of quantitative easing is still on the cards.

At the same time, the Bank of England Monetary Policy Committee (MPC) has decided to keep their asset purchase programme of Quantitative Easing (QE) on hold at £200bn.

This was a widely expected move. Members of the MPC are having to balance inflationary fears with the need to prevent dampening the economic recovery.

Whilst price inflation, as measured by the Consumer Prices Index (CPI), has been falling in recent months, it remains above the government target of 2%. The prospect of public spending cuts this autumn should reduce this inflationary pressure, although the VAT increase to 20% in January is likely to create a short-term spike.

A new survey from unbiased.co.uk has found that 67% of people think that interest rates will remain unchanged for the rest of this year.

Opinion on the future timing and severity of interest rates increases has become increasingly divided in the past couple of months, although consensus remains that rates will need to remain lower for longer.

This remains above the Government target of 2% for CPI, but is heading in the right direction towards this target level.

These latest figures will prompt another letter from the governor of the Bank of England to the chancellor of the exchequer, explaining why inflation remains more than 1% above the target level.

The Retail Prices Index (RPI) measure of price inflation is now 4.8% for the year to July, falling from 5% in the previous month. RPI is a measure of inflation including mortgage and associated housing costs.

Inflation faced downward pressure for the year to July due to a number of factors. These included the falling price of second-hand cars, lower petrol prices and falling clothing prices.

Economists remain mixed in their views on where inflation will head next in the UK. The VAT increase, from 17.5% to 20% in January, is likely to cause a short-term spike in price inflation early next year, but other factors suggest that inflation will continue to fall.

Inflation in the UK remains above the average level of price inflation in Europe. CPI is used as an international measure of inflation, with the EU as a whole at 1.9% compared to the UK at 3.2%, both for the year to June.

We have to now wait until 14th September to learn if price inflation in the UK will continue to fall.