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Vague inflation

Everybody knows inflation is rising. What’s less appreciated, though, is that the level of consumer prices (and therefore the annual change) is not so much an objective fact as a measure which is both theoretically controversial and distant from many of our actual experiences.

The CPI is a bundle of goods and services, in which items are weighted by the spending patterns of the average household. But of course, there is huge variation around most averages. Electricity, gas, coal and oil have a weight of 3.3 per cent in the CPI. Poorer households, however, spend a bigger fraction on them. And with these costs rising 23.2 per cent year-on-year now, they face a higher inflation rate than the 5.1 per cent headline rate.

This issue of how to reduce different experiences to a single number is especially tricky for housing: how do we average housing costs to encompass people paying one-third of their income in rent and those living in mortgage-free owner-occupation? Of the CPI, 9.4 per cent is devoted to rent, but owner-occupiers’ costs don’t feature. They do appear in the ONS’s CPIH measure, but in a peculiar way. The ONS measures them by the rents tenants pay on comparable properties.

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