On its website the Bank of England has a tool allowing users to find out how prices have changed ever since King John was on the English throne back in 1209. By its calculations, goods and services costing £10 six years before Magna Carta was sealed would today cost £16,427.96.
With the latest cost of living figures due out on Wednesday morning, Threadneedle Street’s ready reckoner puts the UK’s inflation record into historical perspective. It also highlights the many different ways – official and unofficial – in which changes to the cost of living are calculated.
The Bank pieced together its guide from a number of sources; a cost of living index provided by Prof Greg Clark for 1209 to 1750; a composite prices index for the years 1750-1947; and the consumer prices index (CPI) and retail prices index (RPI) for the years since then.
But what exactly do these indices measure, and what are the benefits and limits of these methods? Here are some of the key terms deployed by statisticians, central bankers, politicians and economists to understand changing prices and what they mean.
The big three
The Office for National Statistics (ONS) provides three main measures of inflation each month Its preferred measure of the cost of living is CPIH – the consumer prices index adjusted for housing costs. The ONS considers this the most comprehensive measure available because it takes a stab at calculating the costs of owner-occupation. As with the other official inflation yardsticks, price movements are monitored for a basket of more than 700 goods and services.
Even so, CPIH is not the annual inflation number that is normally reported in the media. The one that will grab the headlines on Wednesday will be CPI, which does not contain housing costs, because this is the measure used by the government to judge whether the Bank is meeting the official 2% inflation target. It is also used for the uprating of state benefits and – in the days before they were frozen – tax allowances and thresholds.
Before the advent of CPI in the 1990s, inflation was measured by RPI, which has been around since 1947 and includes items not covered by CPI or CPIH such as council tax, mortgage interest payments, ground rent and estate agents’ fees. The ONS no longer treats RPI as a national statistic because it thinks there are design problems with the model used to calculate price changes and says it consistently overstates inflation.
While RPI is used for the indexing of government bonds and as the basis for many pay negotiations, it will no longer be published after 2030. It is not hard to see why wage bargainers prefer to rely on RPI as their benchmark: annual inflation on that measure stood at 13.5% in March, compared with 10.1% for CPI and 8.9% for CPIH.
Further measures
As a response to those who say none of these figures actually reflect how much extra they are paying for their weekly shop, the ONS now also publishes cost indices that are supposed to reflect more accurately the spending patterns of different types of households, including those that are retired, non-retired, with children and without, renting and owner-occupier and by various income levels. These are released once a year but will soon be out quarterly.
On top of that, the producer prices index and the services producer prices index measure inflationary pressure in two of the key sectors of the economy at an early stage of the process. The Bank also keeps a close eye on CPI excluding food, fuel, tobacco and alcohol, since it is seen as gauge of underlying – or core – inflation.
Other useful terms
Periods of rapidly rising prices also generate their own vocabulary. Stagflation is a period when the inflation rate is high but the economy is either going backwards or growing only very slowly. It was first coined in the 1970s but has come back into fashion as western economies – including the UK – have struggled after Russia’s invasion of Ukraine.
Shrinkflation is where a consumer goes into a supermarket and finds that the number of chicken breasts in the multipack has been cut from eight to six or the bottle of washing-up liquid has become smaller while the price remains the same.
Greedflation, only recently coined, describes the way in which companies have raised prices by more than their own cost increases to boost their profit margins. The investigation into whether supermarkets have been gouging motorists over fuel prices is one example of this.
Hyperinflation is where inflation is high and accelerating, and is accompanied by a collapsing currency. The most famous example is Germany in 1923, when people trundled wheelbarrows full of bank notes to the shops. At the peak of the crisis, a loaf of bread cost 200,000,000,000 marks. Contrast that with Britain’s stable prices of the previous century, with £10 buying you more at the outbreak of the first world war than just after Napoleon was defeated. Prices fell by 0.3% a year on average between 1815 and 1914; in the years since, inflation has averaged more than 4% a year.
