Hello readers, welcome back to my blog. Last time I shared with you my EPQ into the effects of corruption in Kenya. If you didn’t get a chance to read it, I hope you leaned some valuable points from the summary and now understand why corruption is so damaging in developing countries. In today’s post I thought I would discuss the idea of inflation and the new measure, CPI-H that has recently been introduced. Understanding inflation is important in economics as it determines how expensive things are, influences interest rates and can affect savings.
Inflation is the sustained increase in the general price level and is officially measured through CPI in the UK. CPI stands for consumer price index and is essentially a virtual shopping basket of over 700 goods and services, which are weighted according to relative importance. These goods and services such as transportation, food and medical care, are chosen by using the ONS Family expenditure survey and 150 different regions across the country are considered.
The value is calculated by taking price changes over time for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country and thus can be unrepresentative of certain groups of people as an average figure is produced. The most recent figure for inflation in the UK was 1% in September 2016.
From March 2017 however, the ONS will be changing the official of measure of inflation in the UK to CPI-H, which will add accommodation and the costs of owning a house to the consumer basket. In the most recent data, the shift would have raised the inflation measure from 1 per cent in September under the CPI measure to 1.2 per cent, calculated using CPIH. It is thought that this change is to better reflect everyday price changes, which will include the cost of owning a home. The change is likely to show inflation is higher than currently indicated. Although CPI already includes the cost of renting and running a home, it leaves out special costs faced by property owners. CPIH will include what are called the “costs of housing services associated with owning, maintaining and living in one’s own home”.
It is important to note that statisticians estimate what it would cost homeowners to rent the property they live in, rather than tracking the cost of a mortgage.
One potential implication of changing this is that the Bank of England’s Monetary Policy Committee sets its base interest rate with reference to a 2% CPI target and an asymmetric target of +/- 1%, therefore a different inflation measure which was consistently higher could lead to interest rates being kept higher as well.
Below is a recent article published a few days ago, which discusses the concept in more detail, if you are interested: