The main negative of working in a group is the imbalance of effort from the group members. Some members worked hard to research for the project whilst others only participated minimally. This obviously angered the more hardworking members of the group. The efforts of checking price and completing written work, however, were all carried out by each member. Poor attendance from certain members was another problem with the group, as was a lack of regularly checking the Moodle project forum for the latest updates. When members were not aware of urgent meetings or work they were supposed to have done it held the project up and created negative feelings amongst the other group members.
3. Basket of products
The final basket of products and services was decided during the first group meeting and was corrected at the second group meeting. Firstly, all group members listed the products and services that represented their regular expenditure pattern. Afterwards, the products and services that had been mentioned most often were chosen and the basket was determined. Product categories were created in order to make the list more accurate and systematic. As a result, a basket of products which represented the expenditure of our group was finally approved.
There are twelve product categories with separate items in each, accounting to a total of 43 items to have their prices recorded. The quantity of products and services was also indicated in order to record prices of same quantities each week and to identify the proportion of the group member’s expenditure that goes on each item (i.e. to calculate the weight of each item). The basket of products is:
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Carbohydrates: Bread (loaf/800g), Cornflakes (500g), Noodles (1pkt), Pasta (500g), Potatoes (2kg), Rice (2kg), Sugar (1kg)
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Dairy Products: Butter (250g), Cheese (500g), Milk (2,27l), Yoghurt (500g)
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Drinks: Coca-Cola (2l), Coffee (100g), Orange Juice (1l), Tea (50bags), Vodka (1l)
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Entertainment: Cinema (1 ticket), Clubs (1 entrance)
- Frozen Ready Made Food
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Fruits and Vegetables: Apples (1 kg), Bananas (1 kg), Oranges (1 kg), Tomatoes (1kg), Cucumbers (1 pc)
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Hygiene Products: Conditioner (250ml), Shampoo (250ml), Shower Gel (250ml), Soap (250ml), Toilet paper (4)
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Meat: Chicken Breast (500g), Beef (500g)
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Condiments: Eggs (6), Ketchup (342g), Oil (250g)
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Services: Drink (In Club), Public Transport (ticket), Rent (1), Restaurant (2-courses)
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Stationery: Note-pads (1), Pencils (1), Pens (1)
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Sweets: Chocolate (100g), Cookies (150g)
Comparing our basket of products and services with the official representative basket of goods and services in the Economic & Labour Market Review (Office for National Statistics, ) many differences can be found. The most obvious one is the total number of items: the official basket composes of about 500 different items which represent the spending patterns of consumers within the UK and is rather extensive. Our basket, however, is much smaller, less comprehensive and representative of a student’s expenditure, not that of an average British consumer. As we are a specific group (i.e. students) who do not receive high incomes and are on a tight budget, most of us spend money only on essentials such as food, hygiene products or materials for education such as stationery. Furthermore, entertainment activities are an important part of a typical student’s life, therefore service costs such as cinema tickets, clubs entrance or drinks in the clubs are also included as they occupy quite a large part of student’s spending. Moreover, even though rent payments usually do not change during the rent period (usually 9 months or a year), we decided to include it in the basket as the rent makes up a huge chunk of student expenditure and is essential to mention in order to represent accurate student patterns.
After determining the basket of products and services, each group member selected two categories of items which prices they would monitor during the five week period. The brands of products were selected independently as we represent our own patterns of expenditure. Different supermarkets and shops were chosen in order to check prices in different business environments, pricing systems and to represent the different supermarkets students choose to shop in. This helps create a more accurate average measurement of student inflation.
4. Price Index: construction, results and observations.
The basket of goods used for this observation comprised of 43 items from a mix of consumer goods and services. The items represented what the group believed to be the average spending pattern of a student based on discussions within the group. The group consulted Dunnet, 1998 in order to calculate the figures and weights in an accurate way.
For the basis of this survey the group used Consumer Price Index, or CPI. The price index was constructed from the price data as well as the weighting index. The price data was collected by each group member over the 5 week observational period. Every member of the group then stated the quantity they purchased of each item over a five week period and from this information the representative weight was calculated. In order to construct a weight index the average disposable income had to be established. The average income over five weeks, according to group discussion, was found to be £875. This amount was found by dividing the group’s average income, which was found to be £700, by four, representing the weeks in one month. The average weekly income found was then multiplied with the number of weeks in the survey to find the average disposable income for the 5 week period (see appendix). In order to find the weighted average, the price of each item was multiplied with the amount purchased. The results were then divided by the average income of the five week period. The outcome is then multiplied with 1.000 in order to obtain a more useful figure. The reason for this being that the Office of National Statistics uses this formula and in order to present the most comparable figure the group decided it was most appropriate to use the same calculations. The formula is as follows:
By multiplying the weekly prices of each item with the item’s weight, the weighted average price was established. Then, by adding up all the items, the average weighted price of the basket was found. In order to find the price index, the average weighted price of the basket in a given week is divided with the average weighted price of the base basket, or the first week’s basket. The results are then multiplied with 100 to give percentage of weighted inflation. After the five week observational period the inflation rate was found using this formula:
The weighted inflation rate was found by multiplying the given week’s prices with the base weight and subtracting it from the base price times the base weight. The outcome from that is then divided by the first weeks prices multiplied by the base weight. In order to establish a percentage rate the outcome is multiplied with 100. The formula is as follows:
The results of the price checks are shown in the appendix, diagram 1 and table 1. Over the observation period of five weeks we noted limited changes in prices, with the most noticeable changes appearing between the first and second week when rice fell by 14,78 percent and eggs by over 25 percent. The changes set our observational inflation figure for the weighted index at -0,015 percent for the first week. In the third and fourth week the prices adjusted back toward the base price with a rise in the price of tomatoes by 15 percent in week 3 and a 25,6 percent increase in the price of noodles in week 4 (see appendix, Table 3). This counter-balanced the fall in price in week 1, leaving the inflation figure at -0,015 percent in week 3 and in week 4. In week 5 the price for cornflakes went down by £0,01 from the base price in week 1, setting the weighted index rate at -0,001 percent below the base rate (see appendix, diagram 1).These measurements highlight the fact that not all price changes effect the inflation rate to a significant extent, and that the allocated weight for the individual product must be proportionately large and combined with a price change, in order to alter the inflation curve. There are also cases where price changes over time cancel each other out.
There are subsequently a few different measures of inflation (see chapter 6). The Consumer Price Index is most commonly used, along with the RPI and RPIX. This is due to differences in weighting and what is included in each index. The Retail Price Index does include housing and mortgage interest payments while the RPIX removes mortgage payments from the calculations due to distortion effects of the index on the Bank of England interest rates on mortgages.
For official statistics and inflation measures the CPI is most commonly used, while the RPI is used to decide transfer payments, pensions and so on (Office of National Statistics, 2008).
Our group was very varied in terms of age and nationality which is evident in the weight based calculations. Individual spending patterns differ with national customs and age, residence and preferences and that is clearly visible in the appendix, which shows that the individuals within the group all recording numbers above or below the 1000 point average. This may be caused by higher or lower rent or differing student loans between the individuals for example. This is important as student loans make up the bulk of a students’ income over the time of education and rent payments are most likely students’ largest financial outgoings. Since the group also varied in age, we had individuals who preferred to stay at private residences or lease apartments on the private market rather than staying at the universities’ house of residence and this explains the differences in rent costs.
Like stated above, our results at the end of the observational period recorded a 0,001 percent fall in inflation according to the weighted inflation index, or CPI. The official figures for the period, however, showed a -0,1 percent fall in inflation and movement toward deflation, or negative inflation (Office of National Statistics, Latest Inflation Rates, 2009). This is most likely due to the difference in weighting between our price index and the official index. Student spending patterns differ from that of the average household both due to the age of the individual and the number of persons per household, usually students are only responsible for their own individual expenses and do not support a family. It also shows how the official statistics do not necessarily represent all groups within the society.
The group observed different experiences of inflation according to individual or group spending patterns. A single person household has a different spending pattern from a family of five; the elderly have a different pattern from students and the disabled have yet another pattern. The average weight and spending patterns are exactly that, average, and can only give a rough indication of inflation.
5. Official measures of Inflation
As the data for the period of February will not be published before the deadline the comparison will only take place with the data from January, published on 17 of February.
Retail Prices Index (RPI) inflation slowed to 0.1 per cent in January, down from 0.9 per cent in December and it is the lowest rate it has been since 1960. The monthly change for January in Retail Price Index is -1.3%. The CPI went down to 3.0% from 3.1% and that is 1.0% above the 2.0% Bank of England target. The monthly change for Consumer Price Index for January is -0.7% In contrast with EU the CPI inflation for December 2008 was 1.6% and the estimate inflation for January 2009 is 1.1 % (Eurostat, the Statistical Office of the European Communities). All this data clearly shows disinflation in EU.
Annual inflation rates - 12 month % change
(Source: National Statistics)
The heavier weight on the downward change in inflation annual rate was caused by transport costs where the price of fuels and lubricants fell this year but rose in 2008. The average price of petrol decreased by 2.9p per litre between December 2008 and January 2009, to finally still at 86.3p. Diesel prices fell by 4.0p per litre this January, to stand at 98.4p. In addition fall in car prices, lower costs for vehicle maintenance and repair and a decrease in air ticket costs also contributed to the decrease in inflation. Additionally a significant influence came from housing sector contributing to downward pressure on inflation. The main effect came from mortgage interest payments, house depreciation, housing services, overall housing rents decreased this year, compared with a rise in 2008. There was also a downward effect from fuel costs with electricity and the cost of heating oil falling this year with were increasing a year ago.
The deference between CPI and RPI could be explained by significant contribution from housing with the main factor coming from mortgage interest payments and house depreciation, which are excluded from the CPI.
In contrast there were many factors contributing to an increase in inflation: recreation, alcoholic drinks, cultural services, newspapers, books stationery, the price of toys increased following heavy discounts in December, Christmas time. According to BBC News the inflation will drop even further as the drop in oil prices will bring down the cost of fuel and as retailers try to attract customers with price reductions and promotions. Jonathan Loynes from Capital Economics described the modest decline as a "temporary aberration reflecting the partial reversal of some very aggressive price discounting in December".
Inflation is heading towards deflation and that will create new problems. If that is the case people are likely not to invest and not to spend money as they would rather wait for price reduction, the aggregate demand will decrease. Consequently that will slow down economical growth.
6. Student inflation
The consistent weekly price checks have enabled the group to study how inflation can affect students on a fixed income. It is fair to say that the findings cannot be taken to show the results of inflation on all students due to the amount and type of the goods, but rather works are indicators for the consumption pattern of the project group. The amount and the type of goods are not representative for student as a whole, as there are only 43 goods being bought over a five week period and there are certain goods and services that some students might buy that are not included in the project basket. The official data, which studies a wider basket of goods, will show the needs and wants of more households.
At the beginning of the five week project, the group speculated that there would be minimal price changes in goods and services. Overall, there were only 8 products that changed price during the observation period. The predictions made by the group were thus confirmed by the findings. The changes can be regarded as minor, considering that the basket contained 43 goods and only 8 changed, accounting for 21 percent of the basket. It is perhaps also worth mentioning that all of the changes occurred in the second week of the project. The price changes were mainly found in Asda, Tesco and Somerfield and can be found in the appendix, table 2, table 3 and table 4 with respective weights and quantities.
Tesco: Beef Steak Mince (500g) increased from 2.74 to 2.89. This is a 5.4 percent increase in price. The effect that this had on students was minimal, when considering the allocated average weight of 9/1000.
Somerfield: A Six Pack of Medium Eggs decreased in price from 1.82 to 1.36 during the second week. This is a 25 percent fall in price. Even though the average quantity bought for this product was rather high in the group considering, the low price generated a low weight of 10/1000. This price fall is partly the reason behind the shape of the Laspeyre index, with a significant plunge during the second week.
Somerfield: 2kg of Rice decreased in price from 4.33 to 3.69 during the second week. This is a 14 percent fall in price. The effect that this had on students would seem to have been of medium relevance. The purchasing pattern of the student group indicates that rice accounts for 8/1000 of the income, making it the largest expense in the carbohydrate category. Comparing the group to an average household would reveal a similarity in spending. Rice would normally constitute a large part of a staple diet of a household. According to the observations, rice does constitute a great part of the student spending or diet.
Somerfield: The price of 1 packet of Super Noodles fell from £0.62 to £0.49. This is a 20.9% fall in price, and the effect that this had on students over a month could be understood as being minimal, due to the fact that the weight allocated to the product in question was 2/1000. This low weight can be explained by the fact that it is possible that Super Noodles are not highly valued by students.
Somerfield: A 100g jar of Nestle Golden Blend Coffee increased in price from £2.90 to £3.09. This is a 3 percent increase in price. The effect that this had on students would appear to be rather high, as coffee constitutes for a weight of 7/1000.
Somerfield: 1 Litre of Tropicana Pure Orange Juice increased in price from 1.85 and 2.00. This is an 8 percent increase in price. So the effect of the price increase would seem to be rather large. The weight of orange juice is similar to that of coffee, marking 7/1000.
ASDA: The price of cucumbers increased from £0.99 to £1.90. This is an increase of 91 percent. This could be understood to have had little effect on student spending, as despite the increase in price there was still an average of 2 bought per student over the 5 week period.
ASDA: The price of tomatoes increased from £1.29 for 1kg to £1.49 for the same amount. This was an increase in price of 15.5 percent, and the effect that it had on the spending patterns of students can be understood to have been medium as tomatoes account for a weight of 3/1000. The impact is not described as low due to the fact that tomatoes posses relatively high weights in their category.
The Weighted inflation rate, also referred to as CPI, was the primary measurement method for the project inflation and was calculated through the formula described in the section 4 of this report. The final inflation figure observed showed a deflation of -0.001 percent (see appendix, diagram 1).
The simple aggregate inflation rate generated an inflation of 0.101 percent. The inflation figures retrieved through the mentioned method, are merely subtractions of the last weeks overall prices over the first weeks prices. The number produced differed from the weighted inflation rate (CPI), as it does not take into account the quantity purchased of each product, or the weight it has on the income (see appendix, diagram1).
The Laspeyre index, in contrast to a weighted index (the CPI), measures the quantity purchased in relation to the price change. The quantities remain constant throughout the observation period, but the overall price of the basket changes through the functions in the separate product prices. The end result, when measuring index and inflation through the Laspeyre formula, illustrates overall price changes from week to week. That means that the overall purchasing price for the basket of goods, (with a fixed quantity consumed for each individual product remains constant), fluctuates significantly due to small price changes in goods with higher quantities. Week 2 of the observation period experienced this phenomenon as there are rather significant price falls for eggs and rice (see appendix, diagram 1).
The group observations showed the extent on the effects of inflation on students as a group in society. The study showed how a single person student household has a different spending pattern, and ultimately a different value and weighting system, than that of other groups in society, such as families with children to support or middle aged men. The only way to truly measure student spending and the effect of inflation on students would be to use the same base products, the same amount of products, the same prices over the same time period, with different weights as the only variable factor amongst the different groups.
7. Evaluation and Discussion
Student inflation, as shown by the different measurements in the project report, is rather fragmented due to the time limit and the number of goods presented. The number of people that the data represents cannot be considered to be generally representative of students on the whole. It is reasonable to argue that inflation measured under the same circumstances as the official data (i.e. during the same time period with a more extensive basket of goods representing the tastes of a greater number of students), would have generated a result better comparable to the official statistics. For example, the official statistics that the student inflation is compared to ranges over a period of 3 months rather than 5 weeks, which gives prices more room to fluctuate. Another factor, contributing to an inaccurate comparison, is that the official data of Bank of England concerning the time period of the student inflation will be published after this report is written, March 24, 2009.
The different formulas used for measuring the student inflation seams to show a pattern of inflation, moving towards deflation. The Laspeyre formula results in an inflation of 0.0075 percentage points whilst the weighted inflation gives a figure of -0,001 percentage points, indicating deflation. When comparing the weighted index, also referred to as the CPI, to the Bank of England report we see a difference. Bank of England reported negative inflation of -4.5 points, marking actual inflation at about 0.1 percentage points in January 2009. These figures prove that a longer time period would have given a better view of the price situation. They are also incomparable to the official statistics as they do not share the same base figures and do not get the same time to fluctuate. Due to the difference in base year price and variations of goods it is difficult to estimate how similar these figures are and whether or not they are presenting the same pattern, towards deflation. Nevertheless, the plunge depicted in the graph plotting the student Laspeyre measurement of inflation, illustrates that some products did experience rather significant declines in price during the second week.
Not considering the time factor and the limited number of goods, the report illustrates that students spend their income on other things than the general public, which in turn generates different figures in a weighted index. Comparing the basket of goods in this report to an article concerning inflation in the US, published in the New York Times May 3, 2008, the difference in household spending between students and, what is regarded as a regular household, becomes rather evident. This finding points to one particular weakness with the official statistics, concerning its representation of households. As the statistics are generalizations of consumer behavior and preferences, the results generated by the assumptions might not always fit all subgroups in a society. As students usually live on a tighter budget and have a tendency to move more frequently than other groups in society, their consumption pattern is likely to deviate from the average household, thus altering their experience of inflation. Their tight budget also works as an incentive for students to check prices and substitute to cheaper products whenever possible. This may also be true for retired elderly people that may find themselves in a financial position similar to that of a student, giving them an incentive to chase low prices or substituting brands, maybe even reducing the consumption of certain goods in order to manage their tight budget.
More accurate index illustrating student inflation, for a comparison with official inflation, would need to be altered at several levels. The inflation would have been measured over a longer period of time, preferably a year. Furthermore, a greater number of students would have been surveyed about a more extensive list of products, identical to those of the average households. These alterations would result in a more comparable outcome as well as a more accurate estimation of student inflation. This is evident through the above mentioned arguments.
8. References
Dunnet, A. 1998. Understanding the Economy: An Introduction to Macroeconomics. 4th edn. Harlow: Pearson Education Limited.
Gooding. P, Wingfield Damon. 2008. CPI and RPI: the 2008 basket of goods and services. Economic & Labour Market Review,Vol 2, No 4, April 2008. Office for National Statistics. Retrieved March 4, 2009, from
http://www.statistics.gov.uk/elmr/04_08/downloads/ELMR_Apr08_Gooding.pdf
Office of National Statistics. 2009. Inflation: CPI down to 3.0%, RPI down to 0.1%.Retrieved March 6, 2009, from
Office of National Statistics. 2009. Measuring Inflation: Changes to CPI and RPI shopping baskets. Retrieved March 6, 2009, from
9. Appendix
Student income set at £700 a month, making it £875 over a 5 week period. Marked as Y in the formulas.
- Formulas
Weight:
Weight Index:
Weigh Index Inflation Rate:
Simple Aggregate Index:
Simple Aggregate Inflation Rate:
Laspeyre Index:
Laspeyre Inflation Rate:
- Diagrams
Diagram 1.
Diagram 2.
Measures of consumer prices – Bank of England, Inflation Report February 2009
Diagram 3
Official National Statistics - Inflation
CPI down to 3.0%, RPI down to 0.1%
- Tables
Table 1.