The latest UK inflation figures have shown a shock growth in the rate at which prices are increasing.
There are many different ways to calculate inflation
The Consumer Prices Index (CPI) was 3.1% in March while the Retail Prices Index (RPI) hit 4.8% - both well up on February levels of 2.8% and 4.6%.
The inflation measures can have a major influence on the economy, affecting matters such as interest rate decisions, pensions and wage settlements.
Why is there more than one inflation measure?
Basically because there are different ways of measuring the way that prices change.
Both the CPI and RPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated.
The RPI measure is arguably the better known in the UK. Sometimes referred to as the "headline" rate of inflation, it is the rate often cited by unions as a benchmark for agreeing pay settlements.
It is also used by the government to calculate the uprating of benefits such as pensions.
The CPI measure is the rate the government's inflation target is based on. It is an internationally comparable measure of inflation - CPI inflation measures are analysed by the European Central Bank when setting interest rates in the eurozone.
The biggest difference is that the CPI excludes certain housing costs, such as mortgage interest payments and council tax.
Why does the government use the CPI rate?
Until 2003, the government targeted a rate of inflation known as RPIX - which, unlike the RPI measure, excludes mortgage interest payments.
However, in his pre-Budget speech in December 2003, Chancellor Gordon Brown said the inflation target would be switched to the CPI measure with immediate effect.
The government cited three reasons why CPI was a better measure for the purposes of setting monetary policy:
- it gives a more realistic characterisation of consumer behaviour
- it gives a better picture of spending patterns in the UK
- it is a more comparable measure of inflation internationally and represents international best practice.
The government's current inflation target for CPI is 2%.
Why does the government target inflation?
In 1997, when the government gave the Bank of England independence to set interest rates, it gave the bank an inflation target.
The idea was to give markets and individuals more certainty about inflation, so that they could plan for the future.
The Bank of England's role is to make sure that - over its two-year planning horizon - the inflation rate stays with 1% of the target.
If the Bank believes inflation is beginning to rise, it raises interest rates to cool the economy.
But the target is symmetrical - the Bank is also charged with cutting interest rates if it believes inflation will be too low.
If the rate moves by more than one percentage point either way - that is, it breaks out of the range 1% to 3% - the governor of the Bank of England must write to the chancellor to explain why.
How are the indexes calculated?
Both the CPI and RPI are an attempt to measure the changes in the cost of buying a representative basket of UK goods and services.
The methods used to calculate both indexes are similar. Each month thousands of prices for a selection of goods and services are analysed to check on any increases.
Some of the goods and services will carry a higher weighting, reflecting the fact that we spend more on some items than others.
Each year, the make-up of the "basket" of goods and services, and the weightings assigned to them, are revised to take into account changes in spending patterns.
For example, in recent years people have tended to spend more of their money on electrical goods, travel and leisure, while the proportion they have spent on basic items such as food has fallen.
So why do the CPI and RPI values differ?
Not all the items covered by the RPI are included in the CPI measure.
For example, the CPI does not include council tax, mortgage interest payments and some other housing costs.
The CPI measure also includes some items - such as charges for financial services - which are not in the RPI.
Another difference is that the CPI measure covers a broader sample of the population in its calculations than RPI.