The Consumer price index

The C.P.I is split into 12 categories including food and non alcoholic drinks, clothing and footwear and housing. A typical household spends around 30% of their income on transport (15%) , recreation (15%) , 20% of their income on housing, water and fuel (10%) and food and non alcoholic drinks (10%). Health and education make up around 5% of a typical household spending.

2.) When choosing representative items for the basket a number of factors are taken into account. The items need to be easy to find by the price collectors so that price change estimates are based on an adequate number of price quotes collected throughout the UK. These items also need to be available for purchase throughout the year as the CPI is based on the cost of a fixed basket of goods and services. The prices of all possible items in a group are checked to see if the price movements are similar; if a group, if they are similar then a smaller number of items are needed to represent the group. If the price movements differ quite a lot then more items are selected to provide a better overall estimate of the price change for the group.

New items are introduced into a basket to represent groups where existing items in the basket may not adequately represent price changes for all of the goods in the group. An example this year is in the food and non alcoholic beverages group, oven- ready joints have now been included into the basket to reflect a longer term move to prepared food and away from traditional joints of meat. Older television sets have also been replaced as people are now buying new high definition televisions.

3.) The prices of goods and services are rising over the years, there are times where this could be alongside an improvement in quality of the goods and services. The rise in the price of goods and services could therefore be due to a better quality product. Electrical items have become hard to compare lately because of the advances in technology. When items have become more expensive because of an improvement in the quality of the goods the CPI calculated may be over-inflated. Electrical goods may not be measured accurately because of how hard the price comparisons are and this could also lead to over inflation.

The goods in the representative basket are changed annually and only after there is a long term change in the goods of a category. New technology is released more often, the new products are starting to become more unique and therefore it is hard to predict the pattern of technology for the year.

The CPI does not include real estate when calculating the cost of housing it only includes the changes in the price of rent. The problem with this is that the cost of rent is hardly increasing where as real estate prices are increasing dramatically. As the prices of houses are not included the CPI will not necessarily be useful for measuring the change in the cost of living.

The increases in benefits and pensions linked to the CPI may be too small to maintain their real value. The spending pattern of individuals on these schemes are not included when weighting the CPI categories; using the CPI to measure the increase these schemes should receive may result in the pay rise becoming insufficient.

The CPI aims to represent the expenditure of an 'average' household. The average that the CPI calculates does not necessarily represent the change in the expenditure of an individual; there are individuals that have very different spending patterns compared to what is seen as the 'average' household. An individual that spends a lot of time exercising and playing sport may spend more money on leisure services and footwear than the 'average' household; A family or individual without a car would spend much less on petrol and car maintenance than the CPI predicts the 'average' household may spend.

The Consumer Price Index