The Actual Cost Of Living
A more realistic inflation measure shows it's higher than we've been told, says Paul Lewis.
The Office for National Statistics has worked out a new way to measure how fast prices are rising. It’s called the Household Costs Index (HCI) and it shows that in the 12 months to December, prices rose by 5%. That’s higher than the headline figure of 4% that politicians prefer, and is the one quoted in the news based on the Consumer Prices Index (CPI). It’s down from a high of 11.1% in October 2022, but even at 4% is still double the 2% target that the Bank of England is supposed to achieve.
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Statisticians recognise that the CPI is flawed. It’s based on the total amount households spend. But better-off people spend more than those with less money so it is biased towards their spending patterns, not those of less well off people. The new HCI reflects the actual spending of real households. However, the latest figures reverse the trend that previously has shown the better off you are, the less inflation hits you. Now, the lower income group faced HCI inflation of 4.5%. But the increase felt by higher income was 5.6%. A year earlier the figures showed a large difference in the opposite direction. The Office for National Statistics is cautious about them: “The latest inflation rates do not necessarily reflect experience over a longer period of time.” It seems to be due to particular factors such as a fall in domestic fuel prices and a rise in mortgage payments. These costs are included in the HCI but not in the CPI, driving up inflation for people with mortgages to 6.3% in 2023. Owner occupiers without mortgages have seen their prices rise just 4%. For people renting, inflation was 4.9%.
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This new HCI has only been produced for six months and is still experimental, so the Government currently ignores it. The ONS has worked out that since December 2019, prices have risen by a quarter. If your income has risen by less, you’ll not just feel poorer, you’ll be poorer, because you can buy less than you could four years ago. Knowing how your personal rate of inflation differs from the average could be useful in your planning; work out yours at ONS.gov.uk and scroll down to “Personal inflation calculator”.