Jasmine Birtles: Inflation? It’s turning me into a basket case

14 October 2019

Have you noticed that the inflation rate has gone up… or down… or stayed the same? It will be one of those three. It always is

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In September, the Office for National Statistics (ONS), which carries out the measuring, told us that inflation had gone down to a surprisingly low 1.7%.

That meant that, on average, prices rose by 1.7% over the year to August – so something that cost £100 the year before would now cost £101.70.

At the same time, wages grew by 4% a year. Low inflation and high wage growth should have meant that we were all feeling a bit flush. But did you feel flush? I didn’t.

In fact, I noticed that my beloved half pound of butter was still at least 80p more expensive than it was in 2016 and my treasured pot of Earl Grey in my local café was still an inflation-creating £3.80
(I know I shouldn’t, but that café is my ‘office’).

Apparently, the headline inflation rate (the Consumer Prices Index or CPI) went down that month partly because of the price of digital games had reduced. That means nothing to my life.

If I’d been a gluten-free, Go-Pro-wearing, Mamil (middle-aged man in Lycra) obsessed with Fortnite and hiding my gin problem, it may have affected me. But I’m not average enough.

And that’s the problem with these broad-brush calculations. The ONS uses a ‘basket of goods’ to calculate how prices are moving, but my supermarket trolley has barely half the products it measures.

I bet yours has items in it that the ONS couldn’t even dream of. (Go on… let me know your weirdest regular purchases and we’ll see if we can get them into the ONS basket of goods one day.)

House price indices have the same flaw. House prices may have gone up by 0.7%, according to the latest UK HPI, but if your street is unpopular this will be no help at all.

But, still, we need some sort of inflation measure that at least gets near an idea of what we’re all spending – however flawed it might be. And it seems we need one so badly we now have six of them.

First, there is the one I’ve already mentioned– the glamorously termed Consumer Prices Index, which is the measure against which the Bank of England rates itself and is often used to calculate wage increases.

Then, thrillingly, we have the Retail Prices Index (RPI) which has been around for much longer. You would think that it would be the one we all refer to, except for the fact that it is intrinsically wrong. Oops.

That doesn’t stop it from being used as a yard stick for important products such as rail fares, student loan repayments, index-linked gilts and some pension payments. After all, who are we to let a little thing like accuracy get in the way of a good calculation?

The government has been threatening to replace RPI with CPI because its actual wrongness is benefiting a few wealthy pensioners and people who happen to have certain index-linked gilts while costing the taxpayer a few billion. Oops again.

Recently, the Chancellor said he wouldn’t scrap RPI just yet though because it would cause confusion with the calculations of train fares and student loans {Translation: “It looks difficult and a lot of pensioners – our voters – might get really angry about it.”).

So this measure, which gets more inaccurate as time glides on (RPI was 0.6% above CPI in 2018), continues to affect quite significant parts of our outgoings and incomings.

But I digress, and you are probably waiting with bated breath to find out about the other four inflation measures.

Well, creeping into the shoes of the Billy-no-mates RPI is now the CPIH, which takes account of homeowners’ housing costs and is the one statisticians would like us to use. But it hasn’t quite caught on yet.

And then there’s the RPIX (the RPI excluding mortgage interest payments), the RPIY (the RPIX excluding indirect tax changes – are you keeping up?) and the CPIY (which is the CPI excluding indirect taxes). Beyond exciting, huh?!

Why have we got these extra ones? Frankly, that’s beyond my pay grade but it gives statisticians some hope of a job for another few years.