Inflation – let’s get personal

With today’s figures from the Office for National Statistics (ONS) showing that the headline rate of inflation as measured by the Consumer Prices Index (CPI) rebounded to July’s recent high of 10.1% in the year to September, the government is facing calls to ensure that the state pension and other benefits keep pace with inflation. Meanwhile, workers are calling for inflation-matching pay rises and the Bank of England is under renewed pressure to return inflation to its 2% target.

CPIH inflation, (CPIH being the Consumer Prices Index including owner occupiers’ housing costs) also rose by 8.8% up from 8.6% in August, while inflation as measured by the Retail Prices Index (RPI), which although no longer recognised as an official statistic is still compiled and used, increased by 12.6%. The reasons for these differences, and why they matter for people’s finances, will be covered in a future article.

While most people can probably agree that inflation is important, as far as individuals and individual households are concerned, how useful are the figures that are bandied about so readily in the media and elsewhere?

What’s in the inflation basket?

To arrive at the figures for RPI, CPI and CPIH, the Office for National Statistics (ONS) compares the price of a basket of goods and services with the price of a basket of goods and services in the same month a year ago. The contents of the basket are “representative of consumer spending pattens,” says the ONS. In 2022, the basket included popcorn, frozen prawns, coffee pods, lawnmowers, smartwatches and slimming club fees.

In 2022, 19 items were added to the RPI, CPI and CPIH baskets, including meat-free sausages, canned pulses and pet collars. Among the 15 items removed were doughnuts and men’s suits.

Consumer expenditure is then arranged into 12 different groups, such as food and non-alcoholic beverages. Each of these is given a weighting to reflect how much households across the country spend on each. These weightings and the items in the basket are reviewed annually to ensure they continue to match consumer spending patterns.

Limitations

Although the ONS puts a huge amount of time and effort into producing the various inflation indices, when it comes to helping individual households to work out their own individual inflation rate, they have their limitations. For one thing, these indices are averages. Yes, they’re compiled on the basis of an impressive 180,000 or so price quotations and around 170 representative goods and services a month, but they are still averages.

The reality is that if your household’s expenditure diverges from the ONS’s “representative spending patterns”, so too will your household’s inflation rate. To take an example, food and non-alcoholic beverage prices as measured by CPIH rose by 14.6% in the 12 months to September 2022, so if your household spent a higher proportion of its budget on this category of expenditure than the weighting given to it by the ONS, and less on transport costs including motor fuels, where the annual rate eased from 12.4% in August to 10.9% your household inflation rate is likely to have been higher. Conversely, if the pattern of expenditure in your household is the reverse, your inflation rate is likely to be lower.

The ONS itself implicitly recognises the limitations of the inflation indices it produces for individual households, which is why it created a personal inflation calculator. An improved version was launched in August this year. You can try it by clicking here.

Getting personal

The calculator estimates your personal inflation rate based on information you provide about your spending, which it combines with estimates of its own. It then compares the outcome with the latest CPIH inflation figure. After producing a result, a more detailed calculator allows you to add further information about your household spending, potentially providing further insight into how inflation is affecting your household costs.

For research purpose, when I used the ONS’s personal inflation calculator, my own household’s annual inflation rate in the 12 months to September 2022 came out at 7.9%, with the rise in energy bills accounting for 12.3% of my total inflation rate. It took me two or three minutes and I didn’t need to pore over bills. Try it for yourself.

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