Are Inflation Figures Transparent?

Some critics have suggested that items in the ‘basket’ may be chosen for political reasons, rather than for an accurate representation of costs of living. There are a number of reasons why this could be the case.

Steady inflation
In many ways, a low-inflation Government is seen as a successful Government. The last time the economy really struggled was under the Conservatives in the early 90s – and this was cited as a major factor in their loss of power. 3% inflation is by no means a low rate of inflation, but it’s a lot better than 9.5%.

Risk of a downturn
On the other hand, announcing an official inflation rate of 9.5% could be devastating to the economy. In times of uncertainty, a large part of recovery is down to consumer and lender confidence.

High inflation means money is technically worth less – so people are poorer, and spend less. If companies give pay rises in line with high inflation, the prices which cause inflation are sustained, and may continue to rise. If they reach a certain point too quickly, demand will suddenly fall – meaning business are stuck with high costs that are not being met by demand, and may be forced to make cutbacks. If this results in above-average unemployment, companies are hit by a further reduction on demand, which could lead to further cutbacks – potentially sparking economic recession and the need for debt help.

The rise in costs of living may well be higher than inflation would suggest – but the inflation rate affects consumer confidence. In this sense, an unrealistically low inflation figure could in fact save the economy from further damage.

Is it accurate?
Thirdly, a 9.5% inflation rate wouldn’t give the full picture. Yes, some of the most significant costs of living are rising at this rate – but the costs of many other goods and services aren’t. For example, the average consumer does not need to spend 9.5% more of their disposable income on things like CDs, DVDs, books, trips to the cinema, and pints of beer than they did this time last year.

With that in mind, could it be that grouping a ‘basket of goods and services’ together and measuring the average rise in costs isn’t accurate enough? With increases in essential costs of living varying so wildly from that of other goods and services, it might be more accurate to release different figures for different areas of the economy – only then would it be clear just how much are costs are rising, where they are rising, and how much of a problem it is.

However inflation is measured, the Real Cost of Living Index is an important figure. It measures costs which have a huge impact on how much we have left as disposable income. Regardless of whether they publicly acknowledge it, the Government may well take a 9.5% rise in these costs very seriously.