Consumer Prices Index, What Exactly Is It?
Q. I know that inflation is measured by the Consumer Prices Index (CPI), but how exactly is the CPI calculated?
A. That’s a great question as the term ‘CPI’ is mentioned in the media more or less every day, but not everyone knows exactly what it is.
Every year the Office for National Statistics (ONS) reviews and updates the basket of goods and services which it uses to calculate the various Consumer Prices indices.
It recently published its 2018 revisions, which took effect from the February inflation numbers, which were published on 20 March.
The 2018 basket consists of 714 items and on this occasion 14 have been removed and 15 new ones added, with a further 7 “modified”.
The adjustments are a reminder that measuring inflation is no simple matter, a fact also evidenced by the controversy surrounding the Retail Prices Index (RPI).
What we spend our money on and how we allocate our expenditure are far from static.
The headlines changes include:
- Women’s exercise leggings and action cameras such as GoPros have been added to the basket of goods and services
- New food items added to the list include raspberries, quiche and prepared mashed potato. The addition of mash comes some 30 years after dried mashed potato (remember “Smash”?!) left the indices
- Pork pies and edam cheese have been removed. However, pork pie lovers will be relieved to know that their favourite will still be catered for within the wider product category of a “meat-based snack”. This is an example of how the ONS ensures it can collect prices from a broad range of retailers, including shops where pork pies themselves are unavailable but other meat-based snacks are sold.
- The rise of the smartphone means digital camcorders have disappeared from the basket. Similarly, digital media players such as Chromecast and Apple TV have replaced digital TV recorders and receivers such as Freeview boxes.
- The shrinking band of late night revellers, who saw nightclub admissions removed from the index in 2016, will also witness the ejection of the “bottle of lager in a nightclub” from the 2018 index
- ATM charges disappear, thanks to the increased use of contactless payment
The changes grabbed a few headlines, with much focus on the pork pie v quiche front!
The news came on the same day as the Spring Statement, which showed the Office for Budget Responsibility (OBR) expecting CPI inflation to drop to 1.8% by the end of 2019.