Inflation is defined as the rate at which the general level of prices for goods and services, increases over time. For example, if the inflation rate is 3%, then a £1’s worth of midget gems will cost £1.03 next year.
The CPI or Customer Price Index is the official measure of inflation of consumer prices of the United Kingdom. It can also be referred to as the Harmonised Index of Consumer Prices (HICP). The CPI calculates the average price increase as a percentage for a basket of 600 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets.
Now bare with me, although it all sounds quite boring it gets interesting if you look at history. The basket of goods that they use to calculate CPI, or what was the RPI or RPIX changes over time and goods are added or removed. This can be done if goods are no longer relevant but it can also be done to replace items that are rising in price. They are then replaced for alternate and cheaper goods. This then impacts on the inflation figure keeping it lower than what it is. I’m not saying it happens on all products but from a political stand point, keeping inflation low is a priority.
Consider the below chart, the inflation figure is derived from the BLS (Bureau of Labour Statistics). How inflation is calculated was changed in the early 80’s and again in the 90’s with the change to the RPIX. The blue chart is how inflation is calculated now and the grey chart is how inflation would be calculated with pre 82 measurements. 9% inflation sounds about right.
Is the inflation figure reported properly? In my opinion, no it isn’t. The costs of many essential purchases have risen much more steeply than what is reported. In the last 5 years, vehicle tax and insurance has gone up 88%, petrol 56%, electricity and gas 46%, bus and rail fares 32%, food 30% and water 24%. These are not discretionary items but costs you have to pay to just survive. These rises cannot be ignored and need to be represented in actual inflation figures, civil servants need to be doing a better job and held to account, rather than worrying about opinion polls.
I can see the direct impact of inflation in my life, instead of finding crisp notes in my pocket I’m just jingling change these days. Though one thing to consider, it is not a wedge of notes that makes me happy, but its my friends and family that make me richer than any paper billionaire.