From exit polls directing the strategy of a presidential campaign, to TV shows entitled ‘8 out of 10 cats’ and politicians citing figures to convince us the economy is in fact quite healthy in their capable hands, statistics are now inescapable.
This week the Office of National Statistics (ONS) gave us yet another number to digest or spit out in disgust, depending on which way you look at it! They reported that CPI (or inflation) had climbed to an annual rate of 2.5% in February while also announcing several changes they had made to the underlying basket of goods and services used to measure the change in price.
The ONS first started to observe the prices of a ‘basket of goods’, i.e. on things that people typically spend their money, in 1947. Back then this basket included such essentials as unskinned wild rabbits, back-laced women’s corsets, sewing machines and schoolgirls’ navy woollen gym tunics. The wild rabbits of 1947 had become luncheon meat by 1976 and are now represented by a whole mini-basket of meat and poultry including but not limited to rump steak, loin chops, lamb shoulder, fresh chicken breasts and pork sausages. Our changing tastes and technological advances have also resulted in changes from the humble gramophone record now represented by CDs and DVDs and brussels sprouts chucked out in favour of broccoli. This year, those picking up a muffin along with their morning ‘cup of Joe’ from Starbucks show their influence as muffins and fruit smoothies now make the list for the first time. The iPod generation also have their hands in the inflation pie with MP3 players, USB sticks and digital camera memory cards now included.
Although the ONS states that the prices we pay are only 2.5% higher than this time last year, for the man on the street this number seems inconceivably low. The main reason for this is due to the CPI excluding a number of items mainly related to housing, namely council tax and a range of owner-occupier housing costs such as mortgage interest payments and buildings insurance. As a first time home-owner I can tell you that council tax and maintenance charges form a depressingly significant portion of my monthly income, and of course it goes without saying that the higher they go the more depressed I become! Pensioners too are feeling the inflation heat, with a large portion of their income spent on keeping warm and staying fed, basic food prices and gas bills being appreciably higher on the back of $100 a barrel oil has not helped. And so while the Bank of England is busy targeting its mandated 2% inflation rate, many are targeting their very own personal inflation rate. In fact a recent YouGov poll indicates that 86% of the people questioned believed that inflation is higher than the government says. Another BoE poll indicated that 48% believed that prices had risen by more than 3% in the past 12 months. Fool.co.uk’s latest inflation index revealed its readers believed that the true rate of inflation to be 8.1%, or more than the three times the Government’s figure, with the younger generation (18-25year olds) feeling the least impact of inflation.
If the suddenly higher cost of food and fuel we find ourselves faced with here is such a bone of contention, then this is nothing to that of our American cousins. Americans eat and drink (quite a lot!), live in houses that are bone-chillingly air-conditioned in the Summer and over-heated in the Winter, and drive gas-guzzling SUV’s. Yet the Federal Reserve in making monetary policy, focus on core inflation which excludes altogether the cost of food and energy, allowing them to boast of relatively low and stable inflation.
Wherever you are in the world, perceived and expected inflation remain important. Some 45% of the people questioned in a BoE/NOP survey expected inflation to be higher than 3% (with 19% expecting 5% or more!) over the next 12 months in the UK. When people expect inflation to rise, they seek to protect their own interests, the first of which is to try and re-negotiate themselves a higher salary to combat the declining purchasing power of their wages. However, in the slowing economy, the number of bargaining chips is seriously reduced! Although the UK economy is undoubtedly slowing, inflationary pressures remain - due to elevated price expectations, the slowing/ending of negative price shocks, and first and second round effects from the recent rise in commodity prices. This will not only serve to illicit more complaints from the public regarding rising living costs, but will make the decision for the Bank of England regarding interest rates that much harder!
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And finally………With Easter finally here, we hope you and your children enjoyed an egg hunt dissimilar to that in Harrisburg, North Carolina. With 10,000 people turning up for an event organised for 4000 people, the ‘egg drop’ turned into a battle scene. Many adults joined in the fun and games, fighting each other to get hold of plastic eggs containing Nintendo Wiis and Xbox 360s. The organisers, it seems, have learned their lesson early and promised not to offer expensive prizes next year!
Happy Easter!
Aparna Ram
Research Analyst