Inflation basket – what does it say about you?

CPI, the headline inflation figures, grew by 2.7 per cent in January, for the fourth consecutive month. The Bank of England’s target rate of inflation is 2 per cent, but many items – such as energy bills – are going up much faster, so how does the ONS calculate inflation figures?

In its inflation basket is a list of around 700 products and services from 150 areas across the UK. It uses 180,000 price comparisions to calculate both the consumer price index (CPI) and the retail price index (RPI).

Updates are regularly made to the basket in order to make sure it reflects UK spending habits.

But does it really represent our lives?

Left on the shelf

Four years after the UK first entered its most recent periods of recession, champagne is one the items to have been taken out of the basket. The ONS said this is because “the amount of champagne drunk continues to fall”.

Last year analysts Mintel estimated that £690m would be spent on champagne in 2012, compared with over £1bn in the daying days of the boom years in 2007.

Horse meat has not replaced Beef in the CPI Inflation basket despite the surge in consumption.

— Faisal Islam (@faisalislam) March 12, 2013

White rum has replaced champagne in the basket, though the ONS says this has been done to “cover spirits that are drunk by younger people better.”

Other updates to the basket have included continental meats, e-readers and digital television recorders, which replace Freeview boxes. As Economics Editor Faisal Islam notes, above, horsemeat has not made it into the basket despite its surge in consumption.

Items removed from the basket include gas barbecues, pairs of soft contact lenses (which have been replaced by daily disposable lenses), pairs of basin taps and round lettuces.

Not all updates are done to reflect spending habits. For example, blueberries have been added so that the ONS can read data from a broad range of fruits – as fruit prices are typically volatile. Hot chocolate has been added to expand the ONS coverage in its hot drinks category beyond coffee and tea.

Not all households are average
Recent research carried out by the Centre for Economics and Business Research for Kellogg's found that while the CPI increased by 17.7 per cent between December 2007 and December 2012, the price of food and non-alcoholic drinks rose by 28.2 per cent in the same period. 
The study estimated that the poorest 10 per cent of households in the UK spent 23.8 per cent of their gross income on food and non-alcoholic drinks, the richest spent just 4.2 per cent.
And while expenditure on vegetables rose by 15.3 per cent, the volume of vegetables consumed fell by 8 per cent. 

Weight gains

As the average UK consumer spends more on some items than they do on others, the ONS applies a weighting to each item. For example, mortgage interest payments and council tax have a weighting of 930 out of 1,000, motoring expenditure has a weighting of 131, cigarettes have a weighting of 25, and books and newspapers have a weighting of eight.

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According to the weightings, we are a nation less prone to buying cigarettes than we were 20 years ago (the weighting has fallen from 31 to 25), music and films make up less of our spending (weighting is down from nine to three), and coffee is as significant a part of the UK spend as ever (the weighting has remained at 11 from 1993 to 2013).