The official rate of price inflation, as measured by the Consumer Prices Index (CPI), has remained unchanged at 2.7% for the year to January 2013.
Inflation as measured by the Retail Prices Index (RPI) was up slightly, to 3.3% from 3.1% in December.
According to the Office for National Statistics, the biggest factor driving up prices was an increase in the cost of alcohol and tobacco.
There was downwards pressure on price inflation from clothing and footwear.
This latest set of figures was better than expected for CPI, with many analysts expecting a small rise to 2.8% in January.
Inflation remains stubbornly higher than the Bank of England target of 2%, but we do expect a modest fall towards this target by the end of 2013.
Some upwards pressure on inflation from utility prices is yet to be factored into the figures, although the failure of some High Street retailers could help to reduce prices.
Why does inflation matter?
Inflation is important when considering your long-term Financial Planning as it has a big impact on the purchasing power of your income and the real value of your capital.
Even at these relatively modest levels, inflation will erode your buying power over time.
Savers are facing particularly difficult decisions right now with inflation and interest rates at current levels.
The average interest rate on cash ISAs is currently 1.74%, down from 2.55% a year ago, and the range of available ISAs is smaller than it was, with fewer accepting a transfer from other cash ISAs.
With inflation eroding the real value of cash savings, savers can either accept this – although it still makes sense to shop around and obtain the most competitive rates, tax-free using ISA allowances where possible – or consider taking additional risk and exposing some savings to investment assets.
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