Stagflation: A combination of slow economic growth and rising inflation, can lead to stagflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and inflation rose to 27.9 per cent.

Consumer Price Index: CPI is based mainly on a “basket” of food and other consumer goods such as furniture, along with transport costs such as fuel. Tracking the monthly change in the cost of these products helps the government measure inflation.

It does not include housing costs, particularly mortgage interest payments. Also, its methodology is based on an international classification system, which makes it more useful to compare rates with other countries.

Retail Price Index: The RPI is broadly similar to the CPI but includes mortgage repayments and some taxes, and excludes the top 4 per cent of earners. It is used to calculate increases in wages, state benefits and pensions.

Core Inflation: This measures price inflation without taking food, oil, alcohol and tobacco prices into account, and is generally thought to be less reliable than so-called “headline inflation” measures such as the CPI.

Target Inflation: The Government sets the Bank of England a CPI inflation target, which is currently 2 per cent. When inflation rises or falls more than 1 per cent above or below the target, the Governor of the Bank of England must write an open letter to the Chancellor of the Exchequer to explain why.

A target for inflation between 1 per cent and 4 per cent was set after Black Wednesday in 1992. This changed to 2.5 per cent when the Bank of England became independent in 1997 and to 2 per cent in 2003, when it began being calculated from the CPI rather than the RPI.

The Monetary Policy Committee: The MPC is a Bank of England committee of nine people which meets every month to set interest rates. Over half, or five members, are from the Bank of England, including its Governor and two Deputy Governors. The other four are economists from outside the Bank.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

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