Try the Real Life Index for Inflation Truth; Economic Analysis

Article excerpt

Byline: Russell Lynch

WE'VE heard a lot this week about the cost of living, and not much of it good. First the Office for National Statistics throws up a shock as inflation in October jumps to 2.7%. Then the Bank of England produces another batch of pretty fan charts, predicting more gloom next year.

How much use is all this in telling us what is really going on and the likely knock-on effect for the economy? I'm not sure. Take the ONS numbers: the vast proportion of this month's rise in the Consumer Prices Index -- 0.3 percentage points -- comes from the trebling of tuition fees. This is counted now because universities are charging three times as much for their services.

But the students don't have to find the money upfront, instead paying for years after their courses. So is it "real" inflation if it doesn't feel like it at the time? Statisticians, who have to account for everything, would say yes. But it reminds me of the age-old poser of whether a tree falling in the woods makes a noise if there is nobody around to hear it.

People also notice some things more than others: they set their own inflation rate depending on what they spend. The cost of computer games, for example, is down 1.6% on last year, and that particular segment of the CPI has just as big a weighting in the basket of goods used to produce the CPI index as education, which ran a horse and cart through the October inflation numbers.

I'm not into computer games and I'm not a student. But like most others, I'm into living somewhere, electricity, gas and running water. And eating and driving a car. So I've compiled my own measure of the cost of living -- let's call it the RLI, or real life index -- to try to work what's going on.

First, the surprise good news: my basket of essential goods is only 2.5% higher than a year ago, well below the headline CPI headline rate. But the bad news is that this is largely because the ONS's October inflation survey took place before SSE's inflation-busting rise came in, so the November figures will be all the grimmer. Indeed, a look at the graph for the months ahead -- based on forecasts from Capital Economics -- sees the RLI hitting a peak of 4. …