Andy McKay

Jun 17, 2008

How the CPI is calculated

According to everyone, inflation is running rampant in this country. Everything is going up at a crazy rate and yet the Bank of England says it's at 3.3% using the CPI. This seems completely at odds with what the media is telling us. For example: BBC or Guardian.

So how is the CPI calculated? Well there's a good article which basically lists its contents and I believe the offical CPI document is here:

What I was curious about are the weights. I'm sure there's some good theory that show's why these numbers are what they are, but there's some interesting things in there.

For example (page 12) the weighting given to meat (01.1.2) and fish (01.1.3) is 26. Slightly less than furniture, furnishings and carpets at 28. Money per month spent on furnishings can fluctuate greatly a new sofa one month will be a big peak that might equal a years spending on meat and fish. But certainly if meat (9.1%) and fish (8.8%) have been rising rapidly, you'd notice it. Furniture, you wouldn't (3.1%).

Liquid fuels (04.5.3) has risen at 84% but at a miniscule weighting I can only assume that's not petrol. That's in 07.2.3 and has risen at 19.5%. It's weighting is 38. That's slightly more than furniture. But that's the same or less weighting as 09.3 Other recreational items, gardens and pets (at 38), 03.1 Clothing (at 55), 11.1 Catering services (at 118). So yep we spend more on all those each month than petrol, 5 times more in fact.

Here's where I make some assumptions and make things up. With a total weightings of 1000, that means petrol accounts for 3.8% of the total basket. Which means that it would take a lot more increases in petrol to bring the CPI up higher. [1]

The price at the pump seems to reflect a small amount of expenditure (and in my back of a pad calculation I say it accounts for 8% of my disposable income, probably due to my long commute), yet it seems to evoke a very strong worry in people. Perhaps its because its an expenditure I really notice. Council tax (not part of the CPI)? Let's face it I hardly notice, I get the bill fret about it, complain about it, write a blog, get annoyed, put it on direct debit for the year and then worry about the next bill. But the petrol is there and going up every time. There's no "special buy 1 litre get one free", no direct debit, its in your face every day.

Anyway that's my brief trip back to my economics degree. Apologies if I've just got all this wrong.

[1] Yes I'm naively ignoring the effect that petrol rising would have on everything else in the economy and causing a feedback loop and other goods to rise.