The inflation magic trick

Anyone taking a closer look at the figures can see that one measure of inflation has gone down, while the other has gone up.

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Karen Jennings is UNISON’s assistant general secretary for bargaining, negotiating and equalities

Inflation has fallen and the government has hit its inflation target for the first time in over four years – bring out the bunting and rejoice.

Well, the bunting aside, that was the tone of most of the press when reporting the latest inflation figures this week.

But anyone taking a closer look at the figures can see that one measure of inflation has gone down, while the other has gone up; so why are the press focusing almost exclusively on the measure that has gone down?

The reason lies in a magic trick conjured in the world of inflation statistics – a world that may be as dry as the Sahara Desert, but a world that has a powerful impact on pay and living standards.

The UK had been measuring inflation through the Retail Price index for 45 years when the Harmonised Index Consumer Prices (HICP) was established in 1992 – simply as a means to compare inflation across European Union countries as part of the process toward European monetary union.

Initially, HICP just warranted a secondary spot in the monthly inflation publication produced by the Office of National Statistics (ONS). But little by little the prominence of HICP rose and in 2003 it was given new life when renamed the Consumer Price Index (CPI) and declared the government’s key inflation target.

The attempted ‘coup de grace’ for the Retail Price Index (RPI) came last year, when statisticians suddenly discovered ‘profound flaws’ in the way it was calculated that hadn’t been noticed over the previous 66 years. The RPI was found guilty found guilty of failing the ‘time reversal test’ and, worse still, the ‘circularity test’.

Derecognised as a ‘national statistic‘ it was banished deep into the ONS inflation report, where no deadline chasing journalist would ever find it.

With the CPI now given such star billing, it’s no wonder that the press duly reported the fall of the Consumer Price Index to 2 per cent this month, while the increase in RPI to 2.7 per cent went virtually unnoticed.

The truth of the argument about whether CPI or RPI are the better measure of inflation is that both have their flaws and, in certain circumstances, RPI can overstate inflation. However, the tendency of CPI to understate inflation is much more serious.

What matters to workers is not the ‘time reversal test’ or the ‘circularity test’, but how well an inflation measure reflects the reality of the increase in prices that they face in their daily lives and on that score CPI has been found grossly wanting.

The Cost of Living Index, conducted through an exhaustive annual study by respected pay analysts Croner Reward, shows that the cost of living has been running well ahead of even the RPI for the last four consecutive years.

Last year, for instance, the cost of living rose 3.9 per cent. RPI is usually accused of overstating the impact of rising prices, but it actually ran at 3.1 per cent over the same time period, while CPI was hopelessly inaccurate at 2.6 per cent over the year.

Such comparisons may seem like irrelevant squabbling about fractions of a percentage, but when they are converted into an understanding of the chunks taken out of pay packets every month by rising prices, the differences in inflation measures have a very real consequence for employees and pay bargaining.

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