2.2% Inflation – Get Real!

Posted:Abigail Andrews - Thursday, March 13th, 2008 at 8:00 pm.

Are we paying more for less?

You may have heard in the news recently, families are having to pay an extra £1,300 a year in household bills as food and fuel prices rise at their fastest rate for 17 years. Shoppers are paying 4.9 per cent more for their weekly groceries compared with a year ago. Petrol, Train and Bus Fares, Council Tax, Water, Gas, Electric, Bread and Milk are just a few of the essential everyday items that have absolutely flown up in price. Crickey, even the good old English breakfast has been hit by the inflation fairy, as bacon and eggs have also seen large price rises for various reasons.

So what's going on? Everything BUT my wage seems to be going up very, very quickly! I was relieved to see news items this week where others have also noticed the dramatically rising cost of living. Finally it is being reported that most essential everyday items and services are going up far faster than the published rate of inflation! This is something that I have been questioning for a long time, it has been a great relief to see that others have noticed too.

Crickey, even the good old English breakfast has been hit by the inflation fairy, as bacon and eggs have also seen large price rises for various reasons.

What is Inflation?

So how is the cost of living measured and what is inflation? Well lets keep it simple. My apologies if you already know what inflation is, but some people don't, so perhaps I should provide a basic explanation: The government's preferred measure for inflation (the cost of living) is the Consumer Price Index (CPI). This is a measure of the cost of living based on a sample of goods and services that a typical household might buy, including food, heating, household goods, and travel costs. Each year the items are changed to reflect the shifting tastes. This is the important figure, quoted month after month, when the current rate of inflation is announced, as I write it is at 2.2%. A little extra information for you, if we add mortgage payments and council tax to the CPI measurement we get the Retail Price Index (RPI), which is used in most wage negotiations. Clear as mud eh? Now that's out of the way I can get on with my rant......

It certainly does not feel to me as though things are only going up by 2.2%, my purse certainly does not reflect that.

Cost of Living 2.2%? Pahhaha Never!

So why are peoples perceptions of the cost of living so much higher than official figures suggest, and how on earth can the government say that inflation is only 2.2%? It certainly does not feel to me as though things are only going up by 2.2%, my purse certainly does not reflect that. OK here goes with an explanation, part of the reason for the discrepancy is attributed to what is know as the "China affect". The CPI includes some luxury items which are plummeting in price, such as electrical gadgets like TV's, alcohol and some clothes because of stores like Primark perhaps. Why are these goods plummeting? Well, they are made in China, where wages and production costs are low. This partly explains why the index shows that inflation is climbing at just 2.2 %.

My question is; why do we not calculate the cost of living on only essential everyday items? Why do we include "luxury goods" like TV's in our measurements? Surely a true cost of basic living is without luxury goods and only on items deemed necessary to live? If inflation was calculated on only essential everyday items a completely different picture would be painted!

If inflation was calculated on only essential everyday items a completely different picture would be painted!

I and many others would question whether the current methods used to measure inflation, are still relevant and reflective of the actual cost of living. It maybe pointing out the obvious but, it is items and services that we have absolutely no choice but to buy that count, and it is those items that are rising faster than ever. We need to eat, we need to drink, we need to stay warm, and we need to travel in order to get to work to pay to eat and drink and stay warm. I don't profess to be an economist, I ask layman's questions, and invite anyone to comment on this article that can answer those questions for me, until then I will remain mystified and I am sure others will too :)

Inflation hits the poorest worst!

What concerns me the most when I hear news items regarding the "rising cost of living" is that it appears to hit those who can bare it the least, hardest in the pockets. It is people on low incomes and pensioners who will be finding themselves struggling the most. Why? Well, because people with less money spend a disproportionate amount of their income on basics such as food, energy, or public transport, where prices, as you have probably noticed, have been flying up. Pensioners are not likely to benefit from the lower prices of i-pods, or HD TV's or Nintendo consoles are they? Furthermore, those on lower incomes may be forced to shop locally where prices may be more expensive, as they either do not have a car, or cant afford to run one.

What concerns me the most when I hear news items regarding the "rising cost of living" is that it appears to hit those who can bare it the least, hardest in the pockets.

With all this in mind it leads me to yet another of my questions regarding the current measures of inflation; how can the inflation figure quoted month after month be applied to us all equally? As I pointed out earlier, all of us have different circumstances and different spending patterns. Old to young, rich to poor, educated to non educated, male to female; surely we should measure inflation against a a range of different groups within our society. For a start I regularly point out to my husband that it costs more to be a woman, sounds silly but it is true :)

I ask our economists to get real. If we used more accurate measures for inflation we may find a widening wealth gap in Britain. The salaries of the rich are rising far quicker and higher than the national average; boardroom pay at Britain's top companies soared by 37% last year, according to the most recent Guardian pay survey. Furthermore, what makes me laugh most is hearing that government ministers have voted to give themselves yet another massive pay rise, while stating that our crucial services such as nurses, firemen and policemen should get a below inflation pay rise. What on earth is that all about?!?

If we used more accurate measures for inflation we may find a widening wealth gap in Britain.

We can weather the storm

It is unfortunate that I can only end on a bum note but it looks like this UK economy is slowing and many people will receive below-inflation pay rises this year. On top of that we seem to work harder and harder while getting more and more tax taken from us in its various forms. Our disposable incomes are at their lowest level in a over a decade. Things could get a lot worse before they get better. I worry for our pensioners and low income families on a budget, as those are the real people in this country that will suffer. No wonder personal debt is at its highest level and rising, some of the reason is more than likely because people are having to get into debt in order to live. I would advise anyone who is struggling already to take a long hard look at their budget and look at ways of saving money. You can find many tips on this site. It has never been more important than in the current climate to get on top of your households budget. Most of us should be able to weather the storm and remember storms never last for ever! The good times will be back sooner than we think, economies hit highs and lows, that's just the way they work! :)

You can work out your own personal inflation rate on www.statistics.gov.uk.

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