It seems inflation has finally hit zero. rock bottom, and is set to sink further. Or at least, the RPI (Retail Prices Index) has fallen to zero. Its largely been driven down by falling house prices. The crazy thing is.. if you take those out of the equation, and look at, say, the CPI (Consumer Prices Index), inflation has actually risen from 3% to 3.2%, and the Bank of England uses the CPI to adjust interest rates (although there are a few criticisms to do with the CPI). The CPI has been driven up by the cost of imported food, games, petrol and a few other things.

But here’s the catch. if you don’t own your own home, and you either don’t pay rent (housing benefit) or your rent has remained static, then you’re likely to get hammered. Particularly if you’re relatively poor, and don’t have much disposable income (like us). We’re dependent on benefits. A relatively large proportion of our money goes on food.. and that’s where we get hammered. Conducting a quick quiz by the BBC shows that my personal inflation rate is something like 11% – far higher than the CPI. And i’ve noticed what many others have noticed too: prices keep rising. The much vaunted VAT price cut from 17% to 15.5% before christmas has been taken away. Not by the government, but by shops. Its my feeling that the government should be having a good hard look at the supermarket industry, to make sure they’re not actually profiteering from the situation.

It gets worse. Our benefits, like the benefits of everyone in the UK, and govt pensions too, are linked to the RPI. DWP take a measurement of RPI in September every year, then use that figure to apply the cost-of-living rises in April. This year, its around 5% (and CPI, then, was 5.2% – a look at this graph shows that there’s never been such a discrepancy between RPI and CPI, at least in recent years). If the RPI goes beyond zero, if we trip into deflation, then in April 2010, there’s going to be real problems, especially if the CPI, the cost of food, continues to rise, although DWP have already said that if the UK does go into deflation, they will not be looking to reduce benefits from where they are now. Still, if there continues to be a large discrepancy between RPI and CPI then i can forsee some problems on the horizon for the government.

More links: What does inflation mean for you? Q&A – Understanding inflation Personal Inflation Calculator Recession Tracker