According to the government’s official statistics, inflation is currently 3%. But,many people in the UK, would probably say that they feel prices are rising much faster than this official figure. Is the government method wrong? Are people right to be sceptical of official figures. What is the real Rate of Inflation?
CPI (Consumer Price Index).
Firstly the CPI rate excludes many factors. CPI excludes mortgage interest payments (so the recent rise in mortgage costs are excluded). CPI also excludes council tax rises (which are once again above inflation.
The old method of inflation is the Retail Price index RPI. This does include housing costs and council tax. The current RPI gives a higher inflation rate (4.3%) and has done for a long time. It is argued, with good reason that CPI underestimates inflation.
RPI and CPI Inflation
source: ONS
Input prices
Input Price Inflation is rising at 15%. Materials and fuel inflation is approaching 30%. Input prices are often a lead indicator. i.e. because input costs are rising now, we can expect higher inflation in the future. ONS
Some Goods Are Rising Much Faster than inflation
Petrol prices are rising very rapidly. Nearly 30% increase in the past few months. This takes a big part of people’s spending and is a very visible figure. If you drive anywhere, you can’t help but notice the rise in petrol. Therefore, there is a constant reminder of this important barometer of prices.
Food prices
Some food prices are rising at an inflation rate of 20%
Mortgage costs rising.
Banks are increasing their own commercial mortgage rates. Meaning people with mortgages are facing much higher living costs. According to the Times, mortgage costs have risen £1300 in the past 6 months [link]
Some goods are falling or rising slower than inflation.
CPI attempts to measure the average basket of goods. Some goods are rising by 20%, but, other goods are still falling in price. For example, mobile phones, and electronic goods. These do not receive the same headline news as rising oil prices. As a general rule, the media focus on the bad news
(`Record rise in oil prices` - makes front page new)
(”electronic goods from China still falling in real terms” - is never going to make front page news.
Therefore, we tend to give more weighting in our mind to rising prices. We feel bad about price rises, but, tend to give less importance to the prices that are falling.
People’s inflation rates are different.
This is another big problem with CPI. If you have a variable mortage, pay council tax, spend alot on food and petrol, your personal inflation rate is likely to be much higher than the official figure. If you don’t spend on these goods, e.g. buy CDs and ipods, then your personal inflation rate could be lower than the national average. Some people are becoming worse off, some are becoming better off. There is a big divergence in price rises amongst different groups of goods. Different groups of people will have different rates of inflation.
What do you think? Do you feel prices are rising by more than 3% per year?
4 comments ↓
13.04%. This is according to my absurdly anal attention to expenditure & fascination of using excel to store vast amounts of data.
Really, I should be a government economist or spin doctor.
Hi Michael, 13.04% - Quite interesting.
It is obvious to anyone who can count on a level of an average teenager that the inflation is just above 20% over the last year. The food, petrol, food and mortgage are the main items most of us have to buy. Those items that don’t go up by as much or fall have a very limited impact on our spending and in general these are non-essential items. The reason why property market is going down is because people have to spend more for even more essential items like food and transport, so they have less money for a property and it became more difficult to get money they don’t have, ie borrow from the bank. So, a high inflation is inevitable which will be followed by catching up by property market as the currency devalues during a very high inflation. The figures of 3 and 4 percent are equally hillarious and are given to people because they are ready to believe a printed word and a signature from an economist.
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