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Measuring the cost of living

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The ONS Consumer Prices Index and Retail Prices Index provide an accurate and comprehensive picture of consumer price inflation in the UK.

Issue date: 06 June 2008
Type: Statement

The Office for National Statistics publishes two measures of consumer price inflation: the consumer prices index (CPI) and the retail prices index (RPI). Both indexes measure changes in the price of goods and services bought by households in the UK, and provide an important indicator of how the UK economy is performing. The data are used in many ways by the government, businesses, and society in general. They can affect interest rates, tax allowances, wages, state benefits, pensions, maintenance, contracts and many other payments. They also show the impact of inflation on family budgets.

Recent media reports suggest that consumers are experiencing sharp increases in the cost of food and fuel, and that these are not reflected in official inflation rates. At the same time, a number of newspapers have produced their own ‘cost of living’ indexes, which appear to show that inflation rates are higher than those published in the official figures.

These discrepancies do not mean that the official figures are inaccurate. The consumer price indexes produced by the ONS are the most comprehensive and accurate available and are produced to the highest professional standards. ONS collects 120,000 prices of goods and services from a wide range of retailers across the country – including online retailers - ensuring that its indexes accurately reflect price variations throughout the UK. Prices are updated every month and price collectors visit the same retailers each time in order to monitor identical goods and make sure they are comparing like with like each month.

There are a number of reasons why individuals’ experience of inflation may not match the ‘headline’ inflation figures produced from official data. Foremost among these is that the headline figures are an average for all households and by definition will not be a match for everyone. People who spend relatively more of their budget on items with higher price increases, such as petrol, food and heating costs, will have a personal inflation rate that is higher than the headline CPI/RPI; similarly, people who spend relatively more on items with lower price increases, or even price decreases, such as clothing and electrical goods, will experience a lower personal inflation rate. In recognition of this, and to assist anyone who wishes to calculate their personal inflation rate using official data, ONS has created a Personal Inflation Calculator which is free to use on the ONS website which can be accessed via the related links section.

A further reason why trends in official rates may not appear consistent with individual experience is that people tend to notice when prices are rising, whereas when prices are unchanged or even falling they make less of an impression. This is particularly so when prices rise for items that are bought frequently. For example, the price of foods such as bread, milk, eggs and butter, and petrol prices, have risen strongly over the past year. On the other hand, clothing prices are falling but purchases are likely to be more sporadic and the items are less comparable. Prices of electrical goods such as flat screen TVs and computers are also plummeting; these relatively large expenditure items are purchased infrequently.

The independent ‘cost of living’ indexes produced by some newspapers have reported far higher inflation rates than official figures, but there are also valid reasons for these differences. Foremost among these is that these newspaper indexes survey a narrower range of goods and services than those covered by the CPI and RPI, and in some cases select particular brands which do not always represent average price moves. For example, in one index the price of tea bags – based on the price of one individual brand - was reported as rising by 67 per cent, whereas the official data, which is based on 130 price quotes covering 20 different brands, showed a rise of less than 5 per cent.

This selective approach, coupled with the omission of certain categories of household spending in which prices are falling – such as clothing, electrical gadgets and furniture – mean that the newspapers’ cost-of-living indexes inevitably generate higher overall inflation rates. ONS maintains that the true picture of consumer inflation is that revealed via the comprehensive surveys it performs for the CPI and RPI.

For a more detailed discussion of the themes in this Statement please see the link to 'Consumer inflation; perception and reality' in the related links section. 

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