Navigating numbers: Inflation (PowerPoint)

Explore the concept of inflation, its causes, effects, measurement and implications.

1. Contents What is inflation? Calculating inflation The ONS’s findings Challenges The ONS’s tools and datasets 2

2. 3 What is inflation? Inflation is a measure of how prices of goods and services are changing in the UK, and it can have a big impact on people’s household finances. The annual inflation rate is the percentage change in the index in the current month, compared to the same month in the previous year.

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4. 5 The rate of inflation is the change in prices for goods and services over time. There is no universal calculation for inflation. When we think about changes in prices, we are often dealing with a huge number of different goods and services, with different prices in different places and many kinds of variables, including: changes in the quality of goods the impact of one-off events changes in what goods people buy what services people use So, how do we calculate inflation?

5. 6 Index measures Because inflation is a calculation of the increase in price of so many different goods and services, it is calculated using an index. An index is a composite statistic – a measure of changes in a representative group of individual data points. In other words, it is a compound measure that aggregates multiple indicators. An index measure helps us simplify lots of data into an easier-to-understand number.

6. 7 The ‘virtual’ basket of goods and services The most common way to calculate a country’s inflation is to take an average weighted cost of a virtual basket of goods and services in a month. You can then divide it by the same basket from a previous month. The ‘basket’ normally includes food and energy, among other items and services. It is weighted, so certain items are more important in the index than others. This will depend on how frequently goods are bought or services are used. For example, if milk and passionfruit were both in the basket, milk would have more weight than passionfruit.

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8. 9 The ONS’s primary measure of inflation is the Consumer Prices Index including owner occupiers' housing costs and council tax (CPIH).

9. 10 Important statistics in the UK https:// www.ons.gov.uk /economy/ inflationandpriceindices /articles/ consumerpriceinflationhistoricalestimatesandrecenttrendsuk /1950to2022

10. 11 Contributors Food and non-alcoholic beverages drove inflation through much of the 1950s and 1970s. However, housing and household services have been the biggest driver of inflation through most of the period since 1989.

11. 12 Energy prices Since 1989, the biggest driver of Consumer Prices Index including owner occupiers’ housing costs (CPIH) growth has typically been housing and household services, which includes gas and electricity prices. Food and non-alcoholic beverages Food and drink is typically one of the other main drivers of CPIH growth.

12. 13 Oil prices At several points in history, crises and changes in prices in the oil industry have had a significant impact on inflation. This affected energy and food prices, amongst other things.

13. 14 HCIs are a set of experimental measures that describe the experience of different households by measuring changes in costs and prices they face. Different household groups experience different changes in costs. For example, pensioners or low-income households. If a group spends more on a product with a high inflation rate, they will experience a greater increase in costs relative to other households. Where CPIH is used for macroeconomic purposes, when analysing the effect on different households, the ONS uses Household Costs Indices (HCIs).

14. 15 The main difference between CPIH & CPI and HCIs The HCIs basket includes some items not included in the CPIH and CPI , such as mortgage interest payments. The changes in costs of items are added up in a way that gives equal weights to all households. Whereas CPI and CPIH will naturally give a greater weight to higher-spending households.

15. 16 Important statistics in the UK Household Costs Indices for UK household groups: January 2022 to September 2023

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17. 18 There are lots of challenges when it comes to calculating the rate of inflation. What to include Currently, the ONS collects around 180,000 price quotes for around 700 different 'items' in the virtual basket. In a fast-changing economy, the goods people buy are frequently changing. For example, if there is a spending shift towards new technological goods, inflation measures should give these a higher weighting. How to weight items Different items might be more important to different groups. For example, rising electricity and gas prices may affect older people more than younger people. What price to use for an item Do you use the average price for an item? Which average? Different items cost different amounts in different shops, neighbourhoods and regions of the country.

18. 19 Measuring price change when calculating the rate of inflation. How do you control for changes in the quality of goods? Goods can deteriorate or improve in quality and size over time. Inflation measures are designed to pick up on this. Take an iPhone as an example. The iPhone 5 is not as desirable as the iPhone 15 because the quality between the two phones has changed. If we were to compare the price of an iPhone 5 with an iPhone 15, there would be a huge price increase driven by a change in quality rather than inflationary pressure. To control for this, the ONS removes any price change associated with a change in quality so that they can measure pure price change only.

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20. 21 Shopping prices comparison tool Search to see how the average prices of hundreds of shopping items have changed in the last year. You have the option to select from more than 450 items, including: groceries clothing and footwear health recreation and culture services transport household items eating and drinking out The tool will show the current average price of the item compared with the same month the previous year.

21. 22 Consumer Prices Index including owner occupiers' housing costs (CPIH) This dataset is the most comprehensive measure of inflation. It extends CPI to include a measure of council tax costs, along with what is known as owner occupiers' housing costs (OOH). These are costs associated with: • owning your own home • maintaining your own home • living in your own home