Inflation

The government's "preferred" measure of inflation the Consumer Price Index (CPI) has reached 3.3%, higher than I thought would be the case. Predictions of the CPI reaching 4% by the end of this year are now being made and this will feed further inflation via inflationary wage demands. It looks as though the incoming Conservative government of 2010 will be in a similar position to the one that Mrs Thatcher's 1979 government found itself in with regard to inflation.

Of course the real level of inflation is much higher than the government's preferred measure and I have blogged previously as to why the Labour government changed inflation measures to one that excludes housing costs amongst other factors. The Daily Telegraph has launched the Real Cost of Living Index (RCLI) to measure the real rate of inflation and the latest report reveals that

"the Real Cost of Living Index (RCLI) is rising at 9.5 per cent."

Why the discrepancy?

"One explanation is that CPI does not include council tax or mortgage costs – which are major outgoings for many families. Both costs are included in the RCLI, which sets out to give realistic weightings to rising costs, as experienced by an average family."

Then there is taxation:

"For high earners the taxman now takes 37 per cent of income, compared to 36 per cent a year ago. Worse still, if these families move home and have to pay Stamp Duty, according to Smith & Williamson, the taxman will grab more than half their annual earnings - 55 per cent for Mr and Mrs Average; 52 per cent for Mr and Mrs High-flyer."

Power light and heat:

"Everyone uses electricity and bills have risen by an average of 19 per cent over the year. Although council tax has only risen by an average of four per cent, this now costs the average family £26.40 a week, so the RCLI weighted average increase in household bills is 10 per cent."

Groceries:

"Grocery bills have risen by an average of 23 per cent over the past year – but individual items have risen much more. For example, rice has soared by 80 per cent to £1.62 per kilo and the price of frozen peas has gone up by 73 per cent to £1.64 per kilo."

Thus:

"The average family, whose total income - including salary, bank interest, Child Benefit and tax credits - has been calculated at £40,200 by the Office for National Statistics, pays 27 per cent of its income out as direct tax.

Mr and Mrs Average's total income has risen £556 in the last year, but the total tax they pay has risen by £610; so they are £54 worse off.

According to figures provided by accountancy firm Smith & Williamson, this family pays nearly five per cent more income tax and more than 8.5 per cent more National Insurance contributions in 2008 than in 2007."

"Government officials defend the CPI and RPI on the basis that they measure price changes in hundreds of items, rather than an illustrative 30 or so that commercial reality dictates feasible in the private sector."

This ignores the point that people are not arguing with the wide variety of price changes measured but with the make-up of the basket. Why exclude Council Tax, Mortgage repayments, rent, etc. other than because they would make the government's preferred measure much higher?


Back in 2006 a spokesman for the Office for National Statistics said: "The CPI and RPI are specifically not intended to measure what people often refer to as 'the cost of living'." What are they intended for then?