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Written by Dr Eamonn Butler
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Thursday, 10 April 2008 |
 With the economy souring and budgets getting tighter, people are cottoning on to fact that, often, the government's inflation figures do not seem to correspond to real life. The reason for this is the way inflation is calculated – by measuring the price of a basket of particular consumer goods.
On the one hand, yes, the basket reflects what we actually buy. We spend more on TVs and cars than we did in 1950, so the weights of all these things have risen. But it's only an average: reflecting what the whole nation buys, on average. It may not reflect individual circumstances.
Older people, for example, spend much more on heating than the average. And things like that have risen in price fast. They spend less on clothes, cars and computers, all of which are getting cheaper When you look at the basket of goods they actually buy, you find that the rate of inflation they suffer is nearer to 9.6 percent than 2.6 percent.
The same is true of homeowners, who have seen sharp rises in council tax and higher mortgage payments. And they are more likely to buy services than less well-off people, and those have risen in price too. This is why the middle classes rightly complain that inflation seems much higher than the Chancellor and Prime Minister advertise.
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With the IMF forecasting growth for the UK of around 1.6%, I'm assuming that includes inflation at the official CPI level.
Does that mean that for the majority of us who find that 'real' inflation is at 4-9%, the IMF just forecasted a recession with growth of :
1.6% + (official inflation - unofficial inflation) =
-1 to -4% growth?
Or have I misunderstood something?