The prices are wrong

7th January, 2006

Dear Economist,
I am a pensioner and I am wondering if you can explain why my personal recent experience of inflation is so different from the official statistics. Retail price inflation is 2.5 per cent up on last year, but my domestic heating oil bills have doubled, petrol prices have shot up, mortgage and other interest rates are up by 25 per cent, labour rates for tradesmen have gone up etc. I would say that I am paying out 10 per cent a year more to maintain the same standard of living.
Peter McIlwraith, West Sussex

Dear Mr McIlwraith,

The Office for National Statistics regards your consumption patterns, as a pensioner, as sufficiently whacky as to deserve deliberate omission from the retail price index (RPI).

I wouldn’t worry that you’re missing out too much, though. The RPI has never borne much relation to the standard of living, for three reasons.

First, falling prices are only included in the RPI once they’ve fallen enough that people are paying them. Computers have been falling in price since the 1940s, but only the more recent falls have been included in the RPI because ordinary people didn’t buy computers in 1955.

Second, the goods counted in the RPI are always changing. In the 1970s, entertainment meant hula-hooping. Now it’s an Xbox.

I am not sure how many hula-hoops make an Xbox. Neither is anyone else.

Third, and most importantly, quality improvements are very hard to capture. The price of medical care is rising, for instance, but life expectancy has risen too – it was below 50 years in the first half of the 20th century. The invention of antibiotics and vaccinations cannot really be captured in measures of inflation but, thanks to those developments, you’re alive and complaining today.

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