Beware the Government inflation trap

The difference between the Consumer Prices Index (CPI) and the true rate of inflation means that for many people, household income lags behind personal inflation. Unless this is tackled, consumers will increasingly find they not only have less money to put away, but they will be forced to raid savings or turn to debt to make ends meet.

Today, the Office for National Statistics said the CPI climbed 3% from a year ago, compared with 2.5% in March. The increase was primarily driven by changes in the price of gas, electricity and heating oil.

But the Government's preferred measure of inflation, which is used to adjust wages, falls significantly short of the Fool Inflation Index. The bi-annual inflation study, which gauges inflation felt by real people, finds that the pound in our pockets is shrinking twice as quickly - at 8% a year.

The difference between the CPI and true personal inflation means that many families have less money to put away. Currently, the typical British household only saves £1 out of £50 earned. Ten years ago we put away four times more. Fool.co.uk estimates that by 2012, households will face an £8,000 annual shortfall in the family budget.

David Kuo, Head of Personal Finance at Fool.co.uk, says: "The erosion of the amount of money we save each year strongly suggests the true rate of inflation is gradually crippling household budgets.

"The gap between what we earn and what we spend means we have less money to put away. But as the hole turns into a chasm, we are required to patch up the deficit with money previously salted away. However, a point is reached when the gulf can't be bridged.

"Fool.co.uk urges consumers to monitor their household budgets carefully to avoid falling into the Government inflation trap. Just because someone calls the tail on a dog a leg, it doesn't make it a leg. Pause and think - a dog still only has four legs and a tail."