COMPONENTS OF INFLATION

The DFD chain price index can be split into capital and consumption components (for various reasons the consumption component does not match the coverage of the CPI exactly).

Compared with each other, final consumption expenditure and gross fixed capital formation involve a rather different mix of commodities, and the factors influencing price change are quite different. For example, changes in the exchange rate are likely to have a bigger impact on prices for fixed capital formation. Thus, one would not always expect both series to behave in exactly the same way.

The direction and magnitude of the annual percentage change in the consumption series were often quite different to those in the capital series during most of the 1990s, with the capital series appearing considerably more prone to volatility. However, the percentage movements for the two series were more similar in the mid-2000s, and in line with the broader inflation trend. The percentage movements for the two components have since diverged again in recent years (the last two financial years to 2008-09).