The Office for National Statistics has unveiled this year's changes to the 'shopping baskets' it uses to monitor inflation. Here's why this matters.
The Office for National Statistics (ONS) has made its annual changes to the goods and services it includes in its calculations of inflation for the Consumer Prices Index (CPI) and Retail Prices Index (RPI). This is important as they influence changes in taxes, benefits and other things that directly impact our finances.
Each year, the ONS reviews its ‘shopping baskets’ to try to reflect our shopping habits. It measures price inflation of 700 goods and services, for which it obtains 180,000 price quotations from 150 areas across the UK.
In addition, the baskets are ‘weighted’ to account for the fact that we buy more of some items, such as potatoes.
It also only includes items if we spend over £400 million a year on them, although that amount doesn’t have to be spent on the items themselves; again they can be representative of a broader market. So, for example, the ONS measures the broader musical instruments market through sales of acoustic guitars.
And if we spend less than £100 million on an item, out it goes.
What’s changed this year?
Here are some of the major changes to this year’s baskets.
|
In |
Out |
|
eBooks |
Bottles of Champagne bought on licensed premises |
|
Digital television recorders/receivers |
Freeview boxes |
|
Blueberries |
Round lettuces |
|
Vegetable stir fry ingredients |
Pair of basin taps |
|
Non-disposable charcoal barbecue |
Gas barbecue |
|
Daily disposable contact lenses |
Soft contact lenses |
In most of the above cases, items have been removed due to falling sales and replaced by items with growing sales. In other cases, such as the removal of Freeview boxes and the addition of digital television recorders and receivers (which includes Freeview boxes), it reflects changes in technology.
You can see all of the changes and a detailed explanation of the methodology behind the baskets at the ONS website.
How the baskets affect us
[SPOTLIGHT]So the baskets are an interesting gauge of our changing spending habits. But what effect do they directly have on our finances? Well, quite a lot, actually.
These calculations of inflation don’t just tell us how the cost of living is changing – they also play a big part in fiscal policy and the decision-making processes of institutions like the Bank of England's interest rate-setting Monetary Policy Committee.
So the composition of these baskets, and getting them as accurate as possible to represent the spending patterns of ordinary Brits, is hugely significant to all of us, whether we are savers, borrowers, or a little of both.
And there’s an even more direct impact as things such as benefits, pensions, tax allowances and train fares are pegged to either the CPI or RPI measures of inflation.
Here’s a rundown of those links.
|
Index |
Items linked to it |
|
CPI |
Employee National Insurance contributions Basic State Pension (if inflation is highest of the elements in the so-called ‘triple lock’) Jobseekers’ Allowance Disability benefits Maternity benefits Income Support Incapacity benefit Tax Credits Child Benefit Inheritance Tax Capital Gains Tax Public sector pensions Annual ISA allowance Many private sector pension schemes |
|
RPI |
Personal Income Tax allowance Index-linked Government bonds (gilts) Index-linked corporate bonds Index-linked savings certificates (eg NS&I’s) Some final salary pensions Water rates Alcohol, tobacco, gambling and fuel duties Regulated rail fares (+ additional annual increase on top) Student loan interest rates |
Of course, many of the above items have been increased above inflation, below inflation or frozen since the Coalition Government came to power. One of its most controversial moves was to change the way benefits were 'uprated' for inflation to be in line with the lower CPI rather than the higher RPI.
So while the changes to the baskets may attract all manner of witty headlines, they do have a very serious side.