Thursday, 15 September 2011

So What do the Inflation Numbers Really Mean?

Its the middle of the month and TV news reports are all about price increases.  So it must mean that the official UK inflation figures for the previous month have been released.  You see a fancy chart from the Office of National Statistics showing CPI yearly percent changes over the last 18 months (as shown by the chart below):
From the ONS Statistical Bulletin - Consumer Price Indices August 2011,  
But what does that really mean to me in my everyday life?  Whats the context, how is the inflation rate to wages?  How have prices change over the years?  Over the long term are things cheap, but now increasing fast or what?  And where do you find that sort of information, particularly for UK data and not just US data?

Well, having trawled through the internet over the years i have come across the odd nugget of information on inflation adjusted data or charts for the odd commodity like corn or oil.  There are often interesting and thought provoking, but not that relevant to me as its always US data in $ (a good example is the chart below):
US Inflation Adjusted Price of Corn in US Dollars 
However a new website has just come on-line the other week with UK inflation data since 1987 (  They have the ONS inflation data for 50 everyday items and average wages in one single location. But even better than that, it all index to the same point in time making it straight forward to start analyzing the charts straight away.  Much easier than hunting around on the ONS website for hours, finding a bit here and a bit there and having to piece it all together.

Here is one of the interesting things I found out that i didn't know before.  The inflation report for August 2011 in the UK, reported that the rising cost of energy prices were one of the causes to the increasing inflationary pressure on families finances.

From the data and charts from you get the chance to put price changes for electricity into context.  When you comparer the average electricity and gas prices against average wages since 1987 you see an interesting trend.  Electricity and gas prices flatlined from the early 1990’s to around 2006 (see the two charts below):
A chart illustrates how the price of electricy in the UK has changed against average salary from Jan 1987
A graph illustrates how the price of natural gas in the UK has changed against average salary from Jan 1987
Therefore, when compared to wages, the long term the current price of gas is similar to 1987 and electricity is actually cheaper compared to1987.  Is the real problem that we have become addicted to unusually cheap energy?

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