UK Basket Of Goods

The Retail Price Index (which is a method of calculating inflation in the UK) uses a "basket of goods" approach. Things which are being purchased more frequently are included and things that have gone out of fashion are removed. The price is compared year on year (so Feb 2008 with Feb 2007 etc). And the changes in the cost of the goods is considered to be the retail price inflation.

The BBC has a story about the latest changes. Notable inclusions this time are USB memory sticks, muffins and smoothies. Going out are frozen vegetarian meals, stubby bottles of lager and 35mm film. The initial report from the Office of National Statistics is here.

All well and good.

But there is - as usual - a slight problem with this method. First of all, the one used in the UK does not include mortgage repayments. So the RPI is actually a lot lower than real inflation. Secondly, as consumer electronic goods generally get cheaper over time, any comparison with them included also means that the overall inflation rate is lower than it actually is. Thirdly, taking consumer electronic goods once more as an example, it gives a false impression of the true inflation rate for the elderly or the poor - just how many iPods a year do you think your Granny buys in comparison to food and heating bills - as the weighting is not adjusted by age of consumer.

In August 2006, Clerical Medical's report (available for download here) showed that in the previous 10 years, pensioner inflation was 34%. In the twelve months to August 2006, it was 3.9%. The Telegraph reported in December 2006 that the rate for pensioners had gone up to 9%.

As I blogged earlier this year, This Is Money were reporting in January that the true inflation rate for pensioners was running at 7%. Since January - as you may well have noticed - the cost of food, gas, electric and petrol have gone up rather a lot, so this rate is likely to be MUCH higher now.

If you are interested in knowing what your personal inflation rate is, the Office of National Statistics has a calculator here. Although whether you could use this as a basis for negotiating a payrise is doubtful, it is still worth a look.