Cost of Living Index Loses a Toaster but Gains Digital Camera ; BUSINESS ANALYSIS Latest Inflation Basket Depicts a Healthier and More Worldy Nation Less Addicted to Gin

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IF IT'S true that we are what we buy then the average Briton has become healthier, more technically literate and cosmopolitan but a little bit more traditional over the last year.

Mineral water, digital cameras, regional cheeses and acoustic guitars will today join the "basket" of goods and services used to compile the inflation figure. However gin, frozen turkeys and local newspapers will no longer be seen as a staple of the British way of life - at least as the Government's statisticians view it.

A year ago the Office for National Statistics called time on a pint of brown ale, which made way for the price of a cup of cafe latte. In 2002 it was the turn of stock cubes to be consigned to the waste bin in favour of ready-cooked meals for one.

As well as being a closely watched indicator of changing social trends, the annual review of the basket is a key part of ongoing efforts to measure accurately how fast prices are rising.

Inflation is a powerful hidden force in people's lives. In one of his more lucid moments, Ronald Reagan, the former US President, said it was "like a violent mugger". He went on to say it was as frightening as an armed robbery and as fatal as a hit man - an analogy that families who lived through the hyperinflation of the 1970s would recognise.

Three decades on and inflation appears to be, if not dead, then in a vegetative state. Prices are stagnant in Japan, rising by less than 2 per cent a year in the eurozone and US. Central banks and governments around the world have decided to take on the mugger, specifically targeting inflation and in many cases setting a numerical target.

In the UK, where inflation is also dormant, this has led to the birth of a new measure of inflation, taking to five the number of figures released every month by the ONS.

The central measure is the retail prices index (RPI), which attempts to reflect most closely the average consumer's spending pattern. As the nearest thing to a measure of the cost of living, currently running at 2.6 per cent, it is the one unions use when negotiating annual pay rises.

However, if you want inflation without mortgage costs (RPIX) - which the Bank of England used to use when setting interest rates - then prices are rising at 2.4 per cent a year.

If you also want to strip out the impact of indirect taxes (RPIY), then inflation is running at 2.0 per cent. Goods-only inflation? That's just 0.8 per cent. How about services' prices? That's 2.9 per cent.

Lastly there is the new rate used by the Bank - the consumer prices index that excludes all housing costs - which is languishing at 1.4 per cent.

So how fast are prices rising? Statisticians struggle to ensure that they get as close as they can to measuring how much households are spending based on a combination of the types and quantities of goods and services they buy and the price they pay.

The ONS chooses 650 items, which it measures every month. "It would be both impractical and unnecessary to measure price changes of every item bought in every household," David Roe, an ONS statistician, said.

However, spending patterns change over time, altering the amount that people spend on different goods, which would leave the inflation hugely distorted unless it were altered.

So supermarket gin has come out of the index because its sales have fallen compared with vodka and whisky, which remain in the RPI index.

"Similarly while soft drinks are already well covered in the basket, high spending on purchases of soft drinks at licensed premises are perhaps under-represented so bottled water is introduced this year to improve coverage," Mr Roe said.

The fast pace of technological change had led to the inclusion of digital cameras, whose sales have boomed as prices have tumbled, while mini-disc players have fallen by the wayside. …