Education Information

The average household does not really exist, of course, as people buy many different things every month. This can be a problem when dealing with inflation since people on lower earnings consistently spend proportionally more of their income on essentials like food and energy than the better-off. As a result, the price rises for essentials will tend to hit the poorest much harder than the inflation rate suggests. There are two main ways for the ONS to calculate the inflation rate: the “Consumer Price Index” (CPI) and the “Consumer Price Index with Housing costs” (CPIH). CPI is the figure most usually quoted by the media, since it is also the inflation figure the Bank of England is supposed to be trying to control. The older “Retail Price Index” (RPI) is still sometimes cited but has not been the official measure of inflation for a decade. Because all three measures involve slightly 1 different ways of calculating the “average” price rise, they tend to give slightly different rates of inflation. For simplicity, we only use CPI in this pamphlet – but it is worth remembering RPI is typically higher than CPI. The CPI is often referred to as the “headline” rate of inflation because it is based on the standard basket of goods, including food and energy. The “core” rate of inflation, on the other hand, excludes food and energy prices on the grounds that these prices are highly volatile and do not reflect what is going on at a deeper level. The headline rate can contain enormous price variations that matter greatly to the standard of living of working people. In July 2022 headline inflation in the UK stood at 8.8%. But motor fuel prices had risen by 42.3% compared to a year ago – well above the headline figure. Clothing prices, on the other hand, rose only 6.2% in the same 12-month period – so they are still rising, but at a slower rate than the headline figure. “Real terms” refers to economic figures after taking account of inflation. For many decades, inflation has always been above zero – in other words, prices have steadily risen, but at different rates. This means that whatever £1 buys for you today, it is likely to buy less in the future, since the price of everything you could buy with that £1 is likely to have risen by the rate of inflation.

If we want to understand the true change in someone’s income, we obviously need to take account of the fact of constantly rising prices. This is the value in

RPI lost its National Statistic status in 2013. 1

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