This week the inflation basket – the theoretical shopping basket used to measure inflation in the UK – has been updated. What is in and what is out? And how has it changed over the years? And despite wages lagging behind inflation, do we really need some inflation?
In 2016 menthol cigarettes and a child’s swing were given the boot to be replaced by specialist gin and children’s scooters. This year pork pies and a bottle of lager in a nightclub have been left out in the cold: instead, the country will be relying on women’s leggings and mashed potatoes.
As the introduction suggests, I am discussing the basket of goods which is used to calculate UK inflation – and which is updated every year.
We have written many times this year about wages failing to keep up with inflation. In his Spring Statement, the Chancellor suggested that inflation would soon start to fall, but that most people would not see a rise in ‘real’ wages until early next year. First and foremost, what are real wages? They are what your wages will buy after inflation has been taken into account: so if your pay has risen by 2% but inflation has risen by 3%, then you have suffered a fall in your ‘real’ wages.
Two ways to measure inflation
For most of us inflation is a vague feeling that it is costing more to fill the car, or coming back from the corner shop and grumbling that breakfast cereal was £2.20 last week and it is £2.40 this week: suddenly noticing that our money is not going as far as it did.
But the Government needs a rather more precise measure – after all, many state benefits are linked to inflation, as well as the majority of public sector pension payments.
The traditional measure of inflation in the UK was the Retail Prices Index (RPI) but in the mid-90s this was joined by the Consumer Prices Index (CPI). In 2003 the Labour Government switched to using CPI as the measure of inflation, with some muttering at the time that it gave a lower figure for inflation and would, therefore, save the government money on index-linked benefits.
Does a country need inflation?
The idea of an inflation target was first introduced by Chancellor Norman Lamont after the UK left the European Exchange Rate Mechanism in 1992. Today, the inflation target is 2% and the Governor of the Bank of England is required to send the Chancellor a letter of explanation (Please, Sir, the dog ate my inflation figures) if the Bank misses the target.
Even though wages have recently been running behind inflation, a small amount of inflation is, in theory, good for an economy. If there is no inflation, or prices start to fall (deflation) then people put off buying things – in the hope of getting goods at a lower price in the future – and consequently, economic activity and investment slows down. That is why economists generally argue that a country does need a small amount of inflation – for example in Germany (Europe’s most successful economy) inflation in the 12 months to February 2018 was 1.4%.
How does the CPI measure inflation in the UK?
It does this by using a mythical ‘basket’ of goods: there are 700 items in the basket, and their price is monitored in 20,000 outlets across the UK. The basket of goods is updated each year, so it reflects current shopping habits – so this year leggings and mashed potatoes have been joined by quiche, action cameras and soft play sessions.
Mashed potato? No, no: it is the chilled variety, not the Martian version that was in the inflation basket back in the 1970s.
What’s been in the basket over the years?
The contents of the inflation basket are supposed to reflect ‘contemporary life’ and they provide a revealing glimpse into British life since the Second World War: if you have nothing to do over the weekend you can see a comprehensive list of the basket’s contents in the National Archives. But in true Match of the Day style, let me just pick some of the highlights for you…
1947 – and with rationing still in force after the War, the basket contains condensed milk: concentrated, sweetened milk that came in a tin and was not removed from the basket until 1987. The vacuum cleaner was also included for the first time.
1950s – washing machine? Do not be ridiculous: the kitchen mangle was in the basket and was not removed until 1962. Three-piece suits for men were in there, as were corsets for women, lino for the kitchen floor and everyone’s favourite, corned beef.
1956 – NHS prescriptions were included for the first time. Prescriptions had been free when the NHS was launched in 1948 but by the time they were in the 1956 basket, the charge was one shilling (5p) per item.
1962 – fish fingers entered the inflation basket for the first time, with Captain Birds-Eye appearing on our screens five years later.
1970s – the cassette recorder was included for the first time
1980s – as we threw away our sheets and blankets the duvet (or ‘continental quilt’ as your mum called it) became an essential measure of inflation. When you eventually climbed out from under your quilt and went for a night out you proved your sophistication by drinking Cinzano Bianco.
1990s – a disappointing decade with only fromage frais and the CD player being notable additions to the inflation basket
2000s – MP3 players and the SatNav became essential parts of measuring inflation, as was the cost of chicken nuggets
2010s – the latest decade launched with garlic bread replacing pitta bread in the basket, followed by blueberries and sweet potatoes. Streaming music services were also added, as well as e-cig refills.
…Which brings us right up to date, with raspberries joining action cameras and leggings in this year’s basket. Given that raspberries first became popular in the 17th Century you can only ask, what took them so long…