Statistics provide an important window into our economy and how it affects people across the UK. But statistics are not always as easy to spot as you might think – especially when reported alongside other figures relating to economic conditions. It’s important to recognise that, whereas numbers like the Bank of England’s interest rate are a known value, things like the reported inflation rates are statistics – each one is an estimate of something that cannot be precisely measured and so is calculated drawing on large amounts of different data.
Inflation in the economy means that prices are generally rising. To get an overall feel for inflation, and therefore how much we can buy with a fixed amount of income, we rely on a single value.
The Consumer Prices Index (CPI), for example, is produced using data on the prices of a range of selected goods and services, gathered from across the UK. The collected prices are then weighted based on how frequently they were purchased and the share of the overall spending they represent. This is used to create a ‘basket’ of goods that averages out this data, which is published as the CPI for that month. The percentage change between the latest CPI and the number for the same month a year ago gives the current annual inflation rate.
The methods used to calculate inflation mean that it is, inherently, a value that is uncertain. There are many different goods and services that could be included, and prices vary, for example, by location and by outlet. The choice of a representative set of prices and the weightings are based on informed but imperfect judgements. So, while using statistical models and data means we can create good estimates of inflation, it is difficult to calculate exactly – just as it’s hard to precisely predict the weather.
Added to this, the effects of inflation are not uniform – everyone has a different experience of the effects of inflation on purchasing power, and this is different again from the overall health of the economy (similar to how the weather where you are may not be quite the same as the forecast for your part of the country). Indexes for different household types are helpful.
We also see that the rate of inflation can decrease but the cost of certain goods and services continues to increase. It’s important to remember that inflation statistics are averages, so the prices of some goods and services may go up and down faster than others. When inflation is decreasing, what this means is that while the average price increase is slowing down, some prices may still be increasing at a faster rate.
All this complexity, and the statistical work that goes into measuring it, is often lost when the top-level rate of inflation is reported. But it’s important to remember that there is more to it, especially if you need to understand inflation in a more specific way – and it’s important to look out for other hidden statistics, in the news and in day-to-day life.