Back, with an audible sigh of relief from writer and esteemed reader alike, to economics. There's a general feeling in the UK that the although the official consumer price indices (CPI and the older RPI) are way above the 2% official target, they're still seriously understating the true pressure on household finances. There are several factors at play here.
There are certain products whose price everyone knows. Fuel is the most obvious example, and it's been rising sharply for several months. (US readers may not be aware that in the UK we are now paying the equivalent of more than $10 per gallon for unleaded -- so please quit yer bitchin' about your own gas prices!) Lots of household staples are seeing similar increases, thanks to the rise in global commodity prices. Making generalised judgments on the basis of such partial and anecdotal evidence is known as the "availability heuristic" and everyone does it, even economists when they think nobody is looking.
One of the functions of official price indices is to avoid the availability heuristic and provide a scientific measure of overall price levels -- not just what it costs to fill the tank and buy a loaf of bread, but a broad spectrum of products. To do this, statistical agencies compile a notional basket of goods and services, reflecting actual household spending patterns. They then check the prices for the stuff in the basket each month, correct for seasonal factors (because strawberries are cheaper in summer than in winter, for example), and publish an index that everyone can, supposedly, rely on and use.
You don't need to be an economist to see the problems with this. It's perfectly possible to compute "actual household spending patterns" across the whole population, but there's probably no individual household whose own actual spending matches the average, so everyone is likely to have at least a small quibble with the index, if they bother to think about it. What's more, patterns of spending change across each individual's life cycle. For example, I no longer care very much if rail fares are rising sharply, whereas a few years ago, when I was commuting daily into London, it was a big item for me. In my case, at least, the inclusion of rail fares in the basket of goods biases the index upwards.
The selection of goods in the basket is, in fact, a particularly fraught issue, because spending patterns change over time, so things have to be added and subtracted. In the UK, the ONS just carried out this exercise, and raised more than a few eyebrows in the process. Mobile phone ringtone prices are no longer measured, but phone apps and online dating services are in the basket for the first time. Convenience foods (prepared roasts of meat, for example) are now given greater weight, at the expense of less-processed food products. And so on. This may all reflect actual spending patterns (though not mine!), but it's unlikely to cut much ice with the middle-income commuter faced with spending £80 every time he fills up the car.
It's not just an issue in the UK, of course, and today an interesting story reaches us from France. That country's CPI rose 1.7% in the year to February, a figure which apparently nobody finds remotely realistic, for much the same reasons as in the UK. In response, the national statistical agency is going to introduce a simplified "basket of essentials" whose price it will compute each month. They really will be essentials, too: only twenty items -- bread and milk and cheese, rather than apps and dating fees.
Problem solved then, right? Well, probably not. It's unlikely that Carrefour and Auchan and the rest want to take the blame for the squeeze on French living standards, so there's every likelihood that they'll find ways to keep the lid on the prices of the relatively few items in the basket, compensating by boosting the prices of non-"essential" items just that little bit more. Which is more or less where we came in, of course: unless by some statistical freak your consumption pattern exactly matches the "basket of essentials", you're still going to suspect that the official inflation figures are understated.
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