WIREDGOV

The latest inflation data published by the Office for National Statistics (ONS) showed a headline CPI inflation rate of 4.4% in the year to February 2011, up from 4.0% in January.

However, a new analysis by PwC shows that an alternative ‘everyday inflation’ index that focuses on items purchased regularly by households shows a higher inflation reading of 5.4% in the year to February, as set out in Table 1 below.

Table 1: PwC Everyday inflation index for year to February 2011

*Note that, within the CPI, ‘housing’ only includes rent and regular maintenance and repair of dwellings. It does not include other housing spending items such as mortgage interest payments, which are included in the RPI.

Source: PwC analysis of ONS data

The PwC Everyday inflation index covers 61% of the total CPI based on 2011 weights, but in the year to February 2011 accounted for 75% of total CPI inflation. For a fairly typical UK household with post-tax income of £30,000 per annum and spending and savings patterns in line with the UK average for 2010, the calculations imply that ‘everyday inflation’ has imposed an additional cost on the household budget of around £950 per annum over the past year. The precise effect will clearly vary from household to household but this gives an illustration of the broad scale of the impact.

As the chart below shows, the PwC Everyday inflation index has been persistently above the headline CPI inflation rate ever since the latter was first published in detail in 1997. Cumulatively in the 14 years to 2010, the everyday price level has risen by around 54% (around 3.1% per annum) while the headline CPI had risen by only around 30% over this same period (around 1.9% per annum, which is very close to the Bank of England’s 2% target).

The current differential of 1% between the PwC Everyday inflation rate and headline CPI inflation is actually slightly below the average differential of 1.2% for 1997-2010. The greatest differential in annual average terms was 2.5% in 2008, when the everyday inflation rate peaked at 6.1% as compared to average CPI inflation in 2008 of 3.6%.

Within that year, the monthly peak for CPI inflation of 5.2% in the year to September 2008 compared with an everyday inflation rate of 8.3% in the same month, fuelled by sharp rises in global food and energy prices over the previous year. Recent months have seen a less dramatic recurrence of the same pattern of stronger global commodity prices causing everyday UK inflation to rise faster than headline CPI inflation.

John Hawksworth, chief economist at PwC, commented that:

“Many people feel that the headline consumer price inflation index does not capture the full rate of inflation that they face in their regular, everyday purchases. Our analysis confirms that this is indeed the case with the latest ‘everyday inflation’ rate being 5.4% in February as compared to a headline CPI rate of 4.4%. With events in the Middle East and elsewhere continuing to push up global oil prices, this differential may continue to grow in the short term.”

“Furthermore, this is not a new trend since our calculations show that the average everyday inflation rate between 1997 and 2010 was 3.1% per annum, well ahead of average CPI inflation of just 1.9% per annum. According to our calculations, everyday inflation outstripped headline CPI inflation in every one of these 14 years. Cumulatively, everyday prices have risen by around 54% since 1996, as compared to only around 30% for CPI: that’s a big difference.”

“This large and persistent difference reflects the upward pressure on everyday inflation over the past decade from the marked rise in global food and energy prices, both of which impact the regular spending of households significantly. In contrast, the prices of more occasional consumer purchases such as cars, TVs, electrical appliances and clothing have tended to rise less fast on average, so holding down the headline CPI inflation rate. This latter factor represents a real gain to consumers, but not one that they may appreciate fully due to greater awareness of price trends for more regular purchases as captured by our everyday inflation index.”

“Our new everyday inflation index should be of particular interest in understanding how far consumers feel squeezed by rising global food and energy prices, as well as by higher indirect taxes such as the recent VAT rise to 20%. The negative impact on the feel good factor of this tax and price squeeze may be better captured by our everyday inflation index than by the lower headline CPI inflation rate.”