1. Introduction

The “shopping baskets” of items used in compiling the various measures of consumer price inflation are reviewed each year. Some items are taken out of the baskets and some are brought in to make sure the measures are up to date and representative of consumer spending patterns. In 2018, 15 items have been added to the Consumer Prices Index including owner occupiers’ housing costs (CPIH) basket, 14 items have been removed and 7 have been modified.

This article describes the review process and explains how and why the various items in the consumer price inflation baskets are chosen. The contents of the baskets for 2018 are summarised in Annexes A and B, and the main changes from the 2017 price collection are discussed in this article. Similar articles have been published in previous years.

The following are the main measures of consumer price inflation covered in the article.

CPIH

The most comprehensive measure of consumer price inflation, which extends the Consumer Prices Index (CPI) to include owner occupiers’ housing costs (OOH) and Council Tax. Aside from these two components, CPIH is identical to CPI.

CPI

A measure produced to international standards and in line with European regulations. First published in 1997 as the Harmonised Index of Consumer Prices (HICP), the CPI is the inflation measure used in the government’s target for inflation.

Retail Prices Index

A legacy measure that we continue to publish because of its use in long-term contracts and index-linked gilts. In accordance with the Statistics and Registration Service Act 2007, the Retail Prices Index (RPI) and its derivatives were assessed against the Code of Practice for Official Statistics in 2013 and found not to meet the required standard for designation as a National Statistic. Shortcomings of the Retail Prices Index as a measure of inflation describes the issues with the RPI.

This article also summarises two other methodological changes. The first is the inclusion in CPIH and CPI of additional price quotes collected over more than one working week for items with more variable prices, namely fruit and vegetables. The second is a change to the “chain linking” procedure for CPIH and CPI and is part of the improvement made in March 2017 following the introduction of an extra level of detail. These are described in the Other changes section with links to more detailed articles on the subjects.

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2. The shopping basket

Consumer price inflation is the rate at which the prices of goods and services bought by households rise or fall. A convenient way of thinking about this is to imagine a very large “shopping basket” containing those goods and services bought by households. As the prices of the various items in the basket change over time, so does the total cost of the basket. Movements in consumer price inflation indices represent the changing cost of the shopping basket.

In principle, the basket should contain all consumer goods and services purchased by households and the prices measured in every shop or outlet that supplies them. In practice, the consumer price indices are calculated by collecting a sample of prices for a selection of representative goods and services in a range of UK retail locations including the internet. Currently, around 180,000 separate price quotations are used every month in compiling the indices, covering around 700 representative consumer goods and services. These prices are collected in around 140 locations across the UK, from the internet and over the phone.

Within each year, the consumer price indices represent the changing cost of a basket of goods and services of fixed composition, quantity and quality. In practice, this is achieved by:

  • keeping the sample of representative goods and services constant

  • applying a fixed set of weights to price changes for each of the items such that their influence on the overall index reflects their importance in the typical household budget

  • taking care to ensure that replacements for brands that are no longer stocked in an individual shop are of comparable quality

In this way, changes in the consumer price indices from month to month reflect only changes in prices, and not ongoing variations in the quality and quantity of items purchased by consumers.

Although kept constant within year, the contents of the consumer price inflation basket of goods and services and their associated expenditure weights are updated annually. This is important in helping to avoid potential biases that might otherwise develop over time – for example, due to the development of entirely new goods and services, or the tendency for consumers to move away from buying goods and services that have risen relatively rapidly in price and to goods and services whose prices have fallen. For example, if the price of tea rose dramatically during one year, consumers might switch their spending towards coffee, making it necessary to adjust the expenditure weights accordingly in the following year.

These procedures also help to ensure that the indices reflect longer-term trends in consumer spending patterns. For example, the proportion of household expenditure devoted to services has broadly risen overall over the last 25 years. This is reflected both in an increasing weight for this component in the consumer price indices, and the addition of new items in the basket to improve measurement of price changes in this area: examples include playgroup and nanny fees.

Changes to the items and their associated item weights are introduced in the February index each year, but prices are collected for both old and new items in January. This means that the figures for each year can be “chain linked” together to form a long-run price index spanning many years. In other words, price changes between December and January are based on the old basket and weights, while price changes between January and February, and beyond, are based on the new basket and weights. This procedure ensures that the annual changes to the basket and weights do not introduce a discontinuity in prices as measured by the indices.

Consumer price indices, a brief guide: 2017 provides a helpful introduction to the concepts and procedures underpinning the compilation of the consumer price indices. These are described in much greater detail in Consumer Price Indices – Technical Manual and CPIH Compendium.

In reality, the CPIH and Consumer Prices Index (CPI) inflation baskets differ because CPIH includes a measure of owner occupiers’ housing costs and Council Tax that are excluded from CPI. Both the CPIH and CPI baskets contain some items excluded from the Retail Prices Index (RPI) basket such as university accommodation fees and unit trust commissions. Similarly, the RPI basket contains some items (for example, estate agent fees) that are excluded from the CPIH and CPI baskets. The precise weights attached to the individual items also differ. The differences between the inflation measures are discussed in Users and uses of consumer price inflation statistics.

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3. Representative items

There are some individual goods and services where typical household spending is so large that they merit inclusion in the baskets in their own right: examples include petrol and electricity supply. However, it would be both impractical and unnecessary to measure price changes of every item bought by every household in compiling the consumer price indices.

More commonly, a sample of specific goods and services has to be selected that gives a reliable measure of price movements for a broader range of similar items. For example, price changes for garden spades might be considered representative of price changes for other garden tools. The selection of these representative items is judgmental due to the significant difficulties involved in defining an adequate sampling frame, that is, a list of all the individual goods and services bought by households. This restricts the use of traditional random sampling methods when choosing the representative items.

For each product grouping, a number of items are selected whose price movements, when taken together, provide a good estimate of the overall change in prices for the group. For example, there are around 20 representative items in the Consumer Prices Index including owner occupiers’ housing costs (CPIH) “furniture and furnishings” class, from beds to kitchen units, whose prices are used to calculate an overall estimate of price change for all furniture products.

The prices collected for each product group are then combined to produce the overall consumer price indices, with weights proportional to total expenditure on the entire product group. So the weight given to “furniture and furnishings” in the CPIH shopping basket reflects average household spending on all furniture products as opposed to spending on the basket items only. Similarly, the weight of garden spades would be derived from all spending on garden tools.

These expenditure weights have historically been updated annually so that the indices reflect current spending patterns. In line with usual practice, the weights for CPIH and Consumer Prices Index (CPI) classes and higher-level aggregates were updated with effect from the January 2018 index and Retail Prices Index (RPI) section weights will be revised with effect from the February index, at which point the distribution of weights for the more detailed individual item indices within each class or section will also be revised.

However, from 2017, CPIH and CPI subclass and higher level aggregate weights have been updated additionally with the February index. This improvement is the result of an independent report, it brings the procedure into line with best practice and helps us to better meet EU regulations. Assessing the impact of methodological improvements on the Consumer Prices Index, published in 18 October 2016, describes this change in more detail and analyses the impact. Broadly speaking, over the longer term, weights for services have increased while those for goods have decreased. A more detailed article on changes to the published consumer price indices weights for 2018 will be published on 19 March 2018.

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4. Selecting the representative items

A number of factors need to be taken into account when choosing representative items. Of course, the items must be easy to find by the team of people collecting the price quotes, so ensuring that estimates of price change are based on an adequate number of quotes collected throughout the UK. Since the consumer price inflation statistics are based on the cost of fixed in-year baskets of goods and services, ideally they should also be available for purchase throughout the year. However, availability of some clothing and garden items is clearly seasonal and so these goods require a slightly different treatment in the indices.

The number of items chosen to represent each product group within the indices depends both on the weight (that is, expenditure) of the group and also the variability of price changes between the various items that could be selected to represent the group (reflecting, for example, the diversity of products available). Intuitively, it makes sense to choose more items in product groups where spending is high. This helps to minimise sampling variability in the estimate of price change for high-weighted groups and therefore in the overall price index. However, if price movements of all possible items in the group are very similar, it is sufficient to collect prices for only a few1. In contrast, if price movements of all the possible items are very different, prices will be needed for many representative items to get a reliable overall estimate of price change for the group.

Based on this, the allocation of items to broad commodity groups can be analysed, as shown for the 12 divisions of the Consumer Prices Index including owner occupiers’ housing costs (CPIH) in Table 1, and the balance used as an anchor for the annual review of the baskets. The significant allocation of items to the food division relative to its index weight, for example, is partly explained by the relatively high variation in observed price changes between the individual goods in this area. Conversely, a smaller proportion of items relative to index weight is allocated to the restaurants and hotels division, reflecting greater similarity in observed price changes.

In some cases, such as transport and housing, apparent low allocations of items are explained by the presence of some dominant individual items (for example, car purchase and motor fuels, and owner occupiers’ housing costs and housing rents respectively). Here, the case for adding further items to improve coverage of these divisions’ remaining index weights is much weaker. Instead, it is far more important to ensure that the sampling of prices for these heavily weighted items is as comprehensive as possible.

The analysis also helps to highlight those areas of CPIH that might benefit most from improved coverage, for example, where the current allocation of items is broadly comparable to index weight but variation in price changes appears relatively high, possibly reflecting the diversity of goods and services covered. As discussed later in this article, this type of analysis has motivated some of the additions to the baskets in 2018.

Conversely, it also helps to highlight areas where there is scope to remove items from the baskets without any significant loss of precision in the indices. It is important that growth in the overall size of the baskets is limited each year so that production costs and processing times are contained.

Such analysis cannot tell us which items should be priced and so choosing a particular set of items to represent each area remains a matter of judgement. Consumer price inflation commodity groupings are regularly reviewed with the aim that all significant items or distinct markets where consumers’ expenditure exceeds around £400 million annually are explicitly represented in the baskets, except where those items are judged to be adequately represented by other items in the baskets2.

Conversely, where spending on items falls below the £100 million mark, there should be good reason for their continuing inclusion in the baskets. For example, while spending on acoustic guitars and power drills is relatively low, both are included in the baskets to represent wider markets (musical instruments and electrical tools respectively) that would otherwise not be covered explicitly. Trends in expenditure, as well as the latest available figures, help to inform the decisions in all cases.

This focus on expenditures in determining the contents of the baskets partly reflects the data that are available describing household spending patterns. One major source of information comes from the diaries and questionnaires filled in by people taking part in the Office for National Statistics (ONS) Living Costs and Food Survey, a continuous survey of around 5,000 households each year. This is supplemented by detailed analyses of trends presented by market research companies, trade journals and in press reports. Changes in the retail environment are also reported to ONS by the price collectors. Together these various sources of information help to ensure that the goods and services bought by the average household are appropriately represented in the inflation baskets.

It is very important to note that the contents of the baskets and, in particular, changes from one year to the next should not be given significance beyond their purpose as representative items used in estimating consumer price changes. Changes to the baskets will reflect evolving consumer tastes but only over a long run of years. In any particular year, changes to the baskets will reflect a range of considerations such as practical experience in collecting prices, the desire to improve coverage in high spending areas, or analysis that suggests that estimated price changes could be improved by varying the number or type of representative items collected.

Indeed, within each product grouping there is usually a point at which the exact number and choice of items and the precise weights attached to them become a matter of relatively fine judgement. At this detailed level, it is unlikely that such choices would have any significant impact on the consumer price indices. For example, a selection of specific household appliances has been chosen to represent spending on small electrical goods, including irons and kettles. However, other representations would clearly be possible and equally valid.

It should also be noted that the vast majority of the around 700 representative items remain unchanged in 2018. In total, 15 items have been added to the CPIH basket, 14 items have been removed and seven items have been modified in a total of 714 items. The modifications usually relate to the type of shop where items are priced.

In summary, selection of representative items is based on several factors, including:

  • ease of finding and pricing the product

  • availability throughout the year

  • amount spent on a particular item or the group of items

  • variability of prices within a class

  • analysis of balance across the basket

Notes for: Selecting the representative items

  1. At the extreme, if price changes for all the possible items that could be selected in a particular group were identical each month, it would be necessary to select only one of the items for inclusion in the basket. Price changes for this one item would be perfectly representative of price changes for the group as a whole.

  2. Under European regulations, items should be included in the Consumer Prices Index (CPI) where estimated consumers’ expenditure is one part per thousand or more of all expenditure covered by the CPI. Based on household final consumption data underpinning the calculation of the 2018 CPI weights, this is over £900 million.

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5. Changes to the baskets in 2018

Changes to the baskets of goods and services this year are being introduced with the February 2018 consumer price inflation statistics published on 20 March 2018. The baskets will be updated again around the same time next year.

Additions

New additions to the baskets in 2018 and those items removed are set out in Tables 2 and 3, together with a summary of the motivation for these changes. As the tables make clear, these motivations are diverse. As in previous years, changes to the baskets in 2018 certainly should not be viewed as a simple indicator of those products or services whose popularity has either grown or fallen significantly over the past year. All of the changes made this year affect all of the consumer price indices.

A number of new items have been introduced to represent specific markets where consumer spending is significant or growing and existing items in the baskets may not adequately represent price changes for such goods. For example, an action camera has been added to reflect a specific sector within the wider camera market. Similarly, a high chair has been introduced to represent nursery furniture, which has not been covered in the baskets since the removal of a cot in 1999. This item also improves the coverage of a Consumer Prices Index including owner occupiers’ housing costs (CPIH) and Consumer Prices Index (CPI) subclass, other furniture and furnishings, which was previously represented only by a mirror. Subclasses such as this are an additional level of detail first introduced in March 2017. They sit between the class level (for example, furniture and furnishings) and individual items (for example, mirrors).

As in previous years, developments in technology influence the basket update. This year, in addition to the action camera, a digital media player (for example, Apple TV or Amazon Fire TV) has been introduced. This type of equipment has not previously been covered and it replaces a digital television recorder and/or receiver.

In addition to introducing items to represent distinct sectors or markets, a number of items have been introduced to diversify the range of products collected for established groupings, usually where spending is significant. For example, prepared, chilled mashed potato has been added to represent prepared potato products alongside an existing frozen chips item, reflecting the increasing shelf-space devoted to these and prepared vegetables more generally. Quiche has been introduced to improve coverage of the pizza and quiche subclass within bread and cereals. Previously, only pizzas were included from this subclass and their prices have tended to be reasonably volatile so the inclusion of quiche should help interpretation of the figures. Finally, body moisturising lotion has been added to further represent the body care market, distinct from facial moisturiser, which is already included in the baskets.

Analysis of the broad balance of the existing sample of representative items across CPIH and CPI highlighted a need to improve coverage of price changes for a number of classes. These areas include:

  • recreational and sporting services (9.4.1), where a soft play session for children has been added to improve coverage of children’s activities in particular

  • garments (3.1.2), particularly womenswear, with women’s exercise leggings improving coverage of recreational and sports clothing

In each of these cases, the item has been added principally as part of the rebalancing of the baskets to improve their representation of overall price change, with increased spending or product history only a secondary consideration used in selecting the specific product.

This aim of rebalancing the basket can also apply within specific categories and this year, raspberries have replaced peaches and nectarines in the fruit class to improve coverage of soft fruits with an offsetting reduction in the number of stoned fruits. This change will reduce the weight of other soft fruits such as strawberries and should improve the overall estimate of fruit price movements.

In other cases, the new items are direct replacements for similar products that leave the baskets in 2018. For example, a child’s sit and ride toy replaces a tricycle, whose prices have become increasingly difficult to collect reflecting a fall in its availability across a range of shops. For similar reasons, three television items that were categorised by screen-size in the 2017 basket have been replaced by two this year. The new items better reflect size in the current market and should reduce the price collection difficulties experienced with the smallest screen, which increasingly was unavailable in shops.

A further example of a direct replacement is a cooked pastry-based savoury snack, introduced in place of a pasty and pie with the aim of widening collection across a range of takeaway outlets, and not just traditional fish and chip shops. It means that the basket will in future include products such as slices and bakes in addition to traditional pasties and pies. This year, there have also been some changes to the branded products in the chocolate section. The changes reflect market share and an attempt to widen coverage across manufacturers and types of chocolate.

In addition to reviewing the specific items in the basket, the annual update considers the types of shops where prices are collected. Previously, prices for sweet potatoes and blueberries were collected only in supermarkets but the availability of these products in smaller outlets has increased so that prices will now be collected from independents and smaller multiples in addition to the major supermarket chains.

The classification of two items to the different groups in the CPIH and CPI baskets has also changed this year: corn snacks and monthly self-storage fees. Taking corn snacks as an example, this item has moved from the bread and cereals class to the crisps subclass within vegetables, in line with the international classification system used in CPIH and CPI.

Removals

As noted earlier, it is important that growth in the overall size of the baskets is limited each year so that production costs and processing times may be contained. A number of items therefore have been removed from the baskets in 2018 to make space for the new additions. In some cases, this reflects low or decreasing expenditure, such as on lager bought in nightclubs, with the fall in the number of nightclubs, and on camcorders, where the number of models available and market share have fallen as people have switched to using smartphones. In other cases, removal does not necessarily imply that the markets for these goods and services are very small or are declining significantly.

Some items have been removed to make way for new additions to the baskets within the same product grouping. For example, peaches and nectarines have been replaced by raspberries with the aim of improving the measurement of fruit prices overall. As already mentioned, the change rebalances the fruit items from stoned fruits – which continue to be represented by plums and avocados – to soft fruits. The peaches and nectarines item was chosen for removal because its availability varies so much across the seasons that prices were only collected for eight months of the year. It was one of the small number of items in the baskets collected on a seasonal basis.

In some cases a product will remain represented in the baskets even if there is no longer an explicit item. For example, a pasty or savoury pie item has been removed but some prices will continue to be collected as part of a more widely-defined cooked pastry-based savoury snack. The latter aims to capture prices from a wider selection of shops, not just traditional fish and chip shops. Prices of televisions will also continue to be collected as part of a new two-way size breakdown of screens, which replaces the three-way breakdown collected in recent years.

Elsewhere, analysis suggested that there was scope to remove items from certain product groupings without any significant loss of precision in estimates of price changes overall. Within these groupings, those items with relatively low index weights or those items that are variants of others have typically been chosen: examples include pork pies, Edam cheese, leg waxing and ATM charges. In each case, it is judged that price changes for these items remain adequately represented by others that remain in the baskets.

Finally, collection issues can influence changes to the baskets. This year, a child’s tricycle has been replaced by a sit and ride toy as the tricycle was increasingly difficult to find in shops.

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6. Other changes

Two other changes are being introduced with the publication of the February index on 20 March 2018.

Additional price quotes

The first concerns the inclusion in Consumer Prices Index including owner occupiers’ house costs (CPIH) and Consumer Prices Index (CPI) of additional price quotes for fruit and vegetable items. The additional price quotes are collected on the Friday before the main collection day (on the second or third Tuesday of the month) and their inclusion will improve the measurement of price change for items whose prices are more variable within the same month.

It will also bring the CPI into line with European regulations, which state that for energy products and fresh food, such as fruit and vegetables, price collection should be carried out across more than one working week. This additional collection has already been piloted and the results of that pilot suggest that the impact on headline CPIH and CPI is negligible but that there are some more noticeable impacts in lower-level aggregates. Impact of inclusion of additional price quotes on consumer prices indices describes the changes and their impact in more detail. This change is not being applied to the Retail Prices Index (RPI), which is only being maintained through routine changes and where prices are collected on and around the main collection day.

Aggregating CPIH and CPI indices in January

The second change follows on from the introduction last year of an additional level of detail in the Classification of Individual Consumption by Purpose (COICOP) used in aggregating and analysing CPIH and CPI. The change is in how chain linking is conducted in January.

Until January 2017, higher level CPIH and CPI aggregates for January were constructed by rereferencing the index to a December base at the then lowest COICOP level and aggregating to higher levels. From January 2018, higher level CPIH and CPI aggregates for January will be constructed by rereferencing the index to a December base at item level and aggregating to all COICOP levels. This change and its impact were described in Assessing the impact of methodological improvements on the Consumer Prices Index.

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Contact details for this Article

Phil Gooding
cpi@ons.gsi.gov.uk
Telephone: Consumer Price Inflation Enquiries: +44 (0)1633 456900 Consumer Price Inflation recorded message (available after 9.45am on release day): Telephone: +44 (0)800 0113703