This short story has been written as part of a collaboration between University of Swansea student Jeffrey Ndeti and the Office for National Statistics.
Consumer price inflation is the rate at which the price level of goods and services bought by households rises or falls. It is estimated by using price indices. A price index can be interpreted as a large shopping basket containing all the goods and services bought by households. The price index estimates changes to the total cost of this basket.
The Consumer Prices Index (CPI) is one of the commonly used measures of consumer price inflation. This article looks at trends in inflation as measured by the CPI over the last ten years and examines the contribution that prices for different goods and services have made to the rate of CPI inflation over this period.
Trends in CPI over the past 10 years
Annual inflation was on an upward trend from January 2004 to March 2007. Inflation was 1.4% in January 2004, and the rate had doubled to 3.1% by March 2007. Yet inflationary pressures continued to increase with the rate reaching 5.2% in September 2008. Even though the inflation rate fell over the next 12 months, the rate began to increase once again until the end of 2011. More recently, inflation has been on a downward trend and was 1.9% in January 2014, as shown in Figure 1.
Figure 1: Consumer Prices Index, 12-month change, January 2004 to January 2014
Which goods and services have made the largest contribution to changes in the rate of inflation?
Reporting of inflation often focuses on those goods and services that have contributed to a change in the rate of inflation. These are often items with large and erratic price movements such as air fares and motor fuels.
An alternate way to look at the inflation figures is consider the prices of goods and services that make the largest contributions to the actual rate of inflation – rather than the change in the rate.
Over the last decade (2004 to 2013), prices for transport and housing & household services have made the biggest contribution to inflation on average per month. This includes motor fuels, public transport costs, energy bills and rent. Figure 2 shows the average monthly percentage point contribution to CPI inflation of each of the 12 divisions of CPI for the period January 2004 to December 2013 inclusive. Transport and housing & household services both added on average 0.60 percentage points to inflation per month over this period. This is closely followed by the average contribution from food & non-alcoholic beverages prices, which have contributed 0.42 percentage points to inflation per month on average.
On the other hand, clothing & footwear and recreation & culture have both tended to make a negative contribution to monthly inflation since January 2004. Clothing & footwear has decreased annual inflation by 0.17 percentage points per month on average, while prices for recreational & cultural goods and services (eg computers, book and DVDs) have decreased inflation by 0.02 percentage points per month on average.
Figure 2: Average contributions per month to the CPI inflation rate per month between 2004 and 2013, percentage points
The composition of the divisions contributing the most and the least per calendar year has changed following the 2008-09 economic downturn. Table 1 presents the divisions that make the three biggest and three smallest percentage point contributions to CPI inflation in each year since 2004. The following observations can be seen:
Largest contributions to CPI annual inflation per year, per cent of annual inflation rate, 2004 to 2013
|CPI annual inflation (%)||Largest contributions|
|2004||1.4||Transport (36.4)||Restaurants & hotels (29.4)||Housing & household services (27.8)|
|2005||2.0||Housing & household services (32.0)||Transport (30.5)||Miscellaneous (22.9)|
|2006||2.3||Housing & household services (42.1)||Restaurants & hotels (18.9)||Transport (18.6)|
|2007||2.3||Housing & household services (24.0)||Restaurants & hotels (20.4)||Food & non-alcoholic beverages (19.7)|
|2008||3.6||Housing & household services (27.4)||Food & non-alcoholic beverages (26.5)||Transport (23.8)|
|2009||2.2||Food & non-alcoholic beverages (28.1)||Housing & household services (23.9)||Restaurants & hotels (14.4)|
|2010||3.3||Transport (39.8)||Food & non-alcoholic beverages (11.3)||Restaurants & hotels (11.1)|
|2011||4.5||Transport (28.0)||Housing & household services (15.7)||Food & non-alcoholic beverages (13.6)|
|2012||2.8||Housing & household services (23.2)||Food & non-alcoholic beverages (13.2)||Transport (13.1)|
|2013||2.6||Housing & household services (24.4)||Food & non-alcoholic beverages (16.1)||Education (13.1)|
Housing & household services, such as rent and utility bills, usually make a big (if not the biggest) contribution to inflation in most years.
Transport, which includes the cost of private vehicle ownership and use of public transport, also makes a regular big contribution to inflation, most notably in 2010 and 2011.
Food & non-alcoholic beverages (i.e. all food types plus soft and caffeinated drinks) has been among the three biggest contributors to inflation from 2007 onwards whereas restaurants & hotels no longer appears in the top three from 2010 onwards.
Where can I find more information on CPI inflation?
These statistics are based on data published in monthly ONS Consumer Prices Index Statisitcal Bulletin. The contributions can be downloaded from the ONS website. If you have any comments or suggestions, we’d like to hear them. Please email us at: email@example.com.