Measuring Inflation: One Size Will Never Fit All

Posted by siteadmin on Wednesday 6th of September 2017.

The latest quarterly Inflation Report from the Bank of England published in August provides an in-depth analysis of homegrown and imported factors known to influence the rate of inflation. A major conclusion of all the number crunching and judgment calls is that year-on-year inflation – as measured by the CPI – is likely to peak this autumn at about 3%. The official target is 2%.

Traditionally, the BoE would hike interest rates to dampen excessive inflation but, partly because CPI rises were below target for some time until the annual rate jumped to 2.3% in February, this has been deemed unnecessary. Time will tell whether CPI inflation peaks at 3% as the BoE expects, or goes higher. Renewed weakening of sterling, for instance, or a surprise energy cost spike, could sway upcoming BoE decisions.

With CPI inflation above 2.5% and wage growth around 2%, some households are struggling. This has meant increased borrowing, including car finance, which worries the BoE; it has warned banks to avoid reckless lending. That CPI/wage gap may understate the problem, as many households’ spending patterns differ from the basket of items in CPI computations made by the Office for National Statistics (ONS).

No prices index can match everyone’s actual expenditure; our personal inflation rate depends on how we spend our money. Lower airfares do not help a hard-pressed family whose income all goes on essentials. So, the ONS computes various other indices such as the older Retail Prices Index (RPI) and its RPIX variant without a mortgage element, plus the newer CPIH, which includes owner-occupier housing costs.

Inflation matters not only to consumers. As the chairman of the RPI CPI User Group, Tony Cox, pointed out recently, inflation indices needed for macroeconomic purposes may differ from those reflecting household living costs. No single inflation index, it seems, will ever suit everyone.

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